The monetary policy committee (MPC) on Wednesday kept the repo rate on hold at 6.5%, as was widely expected, and maintained the “calibrated tightening" stance. However, significant changes in monetary policy transmission and credit discipline were proposed. The overall tone of the policy seems to be ‘wait and watch and respond as data indicates’.

Although most of the risks flagged by MPC members in October, were at present either subdued or uncertain, the statement and subsequent the Reserve Bank of India (RBI) interaction suggest that many risks were still perceived to be alive.

RBI’s inflation forecasts were revised to reflect low food price inflation and a potential near-term drop in core inflation. The inflation forecast was sharply revised down to 2.7-3.2% for H2 and Q1 FY20 to 3.8-4.2% from the earlier 3.9-4.5% and 4.8%, respectively, with the proviso of upside risks.

The FY19 GDP growth forecast was maintained at 7.4%, somewhat surprisingly, and slightly at odds with the inflation revision, doesn’t seem to adequately embed a prospective demand weakness and credit constraints, and is likely to be undershot. Q2 growth was significantly slower than expected, and Q3 is likely to be lower due to the effects of higher borrowing costs, and decelerating financing-led demand, among other things.

Markets and credit providers were looking at Wednesday’s review for measures to infuse greater liquidity in the system, which has remained unusually tight since the advance corporate tax outgoes in mid-September.

Rather than direct increases in system liquidity, RBI proposed major changes in the liquidity management framework.

The first, and the most direct, was a gradual freeing up of system liquidity with a phased trajectory of quarterly 0.25 percentage point cut in the statutory liquidity ratio (SLR) in order to align with the liquidity coverage ratio.

Second, and more important from the transmission viewpoint, was the proposed shift of new retail and SME (small and medium enterprises) bank loan pricing to an external benchmark, which is being considered as a very significant shift.

Third, it sought improvements in loan disbursement planning and discipline from a mandated minimum loan component in working capital loans. An early dissemination of CRR (cash reserve ratio) balances to banks will also help in liquidity planning.

The shift to loan pricing with an external benchmark might, however, pose challenges. The liquidity deficit is likely to further tighten in second half, despite a significant increase in the central bank’s open market operation, with the continuation of 40,000 crore GSec (government securities) buys per month.

Corporate borrowing rates, particularly short-term commercial papers, have remained high. Bank lending rates have also begun to move up, the median having risen 40 basis points in FY19.

If growth does indeed slow, there is little room for a fiscal stimulus. The central government’s expenditures have risen at a relatively stronger pace, while tax (and other receipts) have continued to remain moderate, compared to the corresponding ratios in earlier years.

Liquidity management for keeping SME loan pricing stable and moderate, will be central to sustaining credit flows.

The question now is the direction of the next change in rates and stance. Will the MPC revert to a “neutral" stance in the next few months from “calibrated tightening"? Not very soon. There is continuing uncertainty on global (and Indian) conditions, with attendant risk of resumed volatility.

Globally, 2019 growth forecasts are falling. Despite expectations of stable US growth, even members of the US Federal Reserve board are signalling slower-than-expected policy rate rise in 2019. This might induce a resumption of the “carry" driven portfolio flows seen in late 2017, thereby inducing appreciating pressure on the Indian currency, which has recovered over the past month.

Core inflation in India has moved lower and is unlikely to rise sharply in the near future. This indicates a very high probability of a continuing pause till well into 2019, at least.

Saugata Bhattacharya is chief economist at Axis Bank Ltd.