RBI rates not hiked: Raghuram Rajan's first mistake?

Reserve Bank governor Raghuram Rajan unexpectedly kept policy interest rate on hold on Wednesday giving relief to millions burdened under high equated monthly installments (EMIs) and sending the stock markets higher after six days.

Most economists expected Dr Rajan to hike rates by 25 basis points to fight stubbornly-high inflation, which hit a 14-month high in November. (Read the full story here)

Justifying the pause, Dr Rajan said, "Our sense is... vegetable inflation is coming down sharply. This may be a spike, let's look through this."

Analysts said the RBI is waiting for food inflation to ease, because the current spikes, according to them, were caused by temporary imbalances. Some economists said the decision to pause might have been taken with an eye on India's sluggish growth. India is currently growing at the slowest pace in a decade.

Here are some aspects of today's policy:

1) Has Dr Rajan erred at a time when inflation is too high?

In speeches over the past week, Dr Rajan made clear inflation is his priority. So, his decision to not hike rates was criticised by many economists. The most scathing comment came from Dariusz Kowalczyk of Credit Agricole, who said, "The RBI governor Rajan is losing credibility after his tough language expressing strong disappointment with high inflation last week." (Read what analysts said on the RBI policy)

2) Has RBI's stance changed with an eye on election?

The Congress party was recently drubbed in state elections held over the past month, in part due to surging food prices. In the past, raising rates has had little impact on controlling prices because India's inflation has more to do with supply side pressures and structural bottlenecks (poor infrastructure). The successive rate hikes failed to rein in inflation, but significantly slowed down India's growth.

Now, with general elections around the corner, is there pressure from New Delhi? Economist Dr Ila Patnaik told NDTV that ever since Dr Rajan took over, the centre has adopted a hands off approach on monetary policy. (Watch full interview)

3) Does the pause signal a collapse in growth?

The RBI's action indicates that the central bank does not see a revival in the economy because a revival would have led to increase in demand and rates would have to go up, Dr Patnaik told NDTV.

"They are seeing no growth revival in the economy, else they would have to push rates up. If they are expecting inflation to go down then it is primarily because they think growth will be really low," she added.

4) Markets snap six-day losing streak, but gains may be short-lived:

The Sensex and the Nifty both extended gains to more than 1.4 per cent. The partially convertible rupee closely mirrored moves in shares and traded higher. However, if the Fed Reserve announces tapering of its economic stimulus later today, markets will fall. Worst of all, the rupee will be adversely impacted. (Read)

5) The bottom line:

This might be a temporary reprieve for all stake holders. The central bank described Wednesday's decision as "a close one". It said it would remain vigilant on inflation and that it would be ready to act even in between policy reviews should headline or core inflation not ease as expected.