The Reserve Bank of India today kept its interest rate unchanged at 6.75%. The consensus forecasts the central bank to lose modestly later in 2016; however, according to Capital Economics, the RBI is likely to keep its repo rate on hold throughout 2016. Out of 44 analysts surveyed by Bloomberg, 42 had forecast that the central bank will keep rates on hold. The RBI has kept other policy rates also unchanged, including the cash reserve ratio at 4%.

The statement by the central bank implies that it will continue with its loosening bias and that the structural reforms in the upcoming Union Budget that stimulate growth while curbing spending will give more space for monetary policy to help growth. However, the finance ministry is likely to decelerate the rate of fiscal tightening in the FY16/17 budget.

The Reserve Bank of India faces a challenge to achieve its medium-term inflation target rate. Inflation accelerated to 5.6% y/y in December. It is expected to further speed up as shortage in crops will accelerated food inflation in the coming months. Food inflation has a significant bearing on inflation expectations in India. The central bank is expected to be wary in averting them from speeding up much further.