Promising an "accommodative monetary policy", RBI Governor Raghuram Rajan however indicated rate cuts going forward depending on favourable macro economic data, and whether banks pass on the benefits of two rate cuts so far this year.
While industry expressed unhappiness over the status quo on rates, Rajan said market dynamics will force banks to lower their interest rates.
"Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy," he said.
The repo rate, at which the Reserve Bank of India lends to the banking system, will continue to be at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.
"We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission.
"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said after unveiling the first bi-monthly monetary policy for financial year 2015-16.
RBI surprised the markets with two rate cuts of 0.25 per cent each outside the scheduled review meetings this year, but banks have yet to respond to these policy rate cut by lowering their lending rates.
After the policy announcement bankers said that most of them will have their asset liability committee meeting week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.
"We would see rates coming down as we see easing of interest rate cycle," SBI Chairperson Arundhati Bhattacharya said. Commenting on the RBI's action, Chief Economic Advisor Arvind Subramanian said: "It is on the expected lines."
"With the RBI choosing not to reduce the policy interest rate, demand revival in the economy and pick up in the investment cycle would remain a tall order," Assocham President Rana Kapoor said.
The ball is clearly in the court of the banks to rise to the occasion since credit off-take has remained weak despite front loading of the two rate cuts, he said.
Rajan expressed the hope that competitive pressure and comfortable liquidity position would encourage the banks to cut lending rates.
"Given that there has been very little transmission from rate cut so far...we are waiting to see transmission take place. I have no doubt that this will happen. If it happens sooner it is better for the economy," he told reporters.
"The Reserve Bank will await the transmission by banks of its front-loaded rate reductions... into their lending rates," said the policy statement.
The RBI said that it would maintain accommodative stance of monetary policy going forward.
Recent unseasonal rains and hailstorm have impacted rabi crops across North and Western India, raising fears of spike in food prices.
Retail inflation increased to 5.37 per cent in February from the 5.19 per cent for previous month, but many analysts expect it to continue to remain much below the RBI's January 2016 target of 6 per cent range.
Another factor which was supporting a rate cut included the range-bound core inflation, which is price rise without the food and oil components.
Other factors like food prices will also be monitored closely, Rajan said, adding that the impact of the recent unseasonal rains will also be monitored closely.
While industry expressed unhappiness over the status quo on rates, Rajan said market dynamics will force banks to lower their interest rates.
"Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy," he said.
The repo rate, at which the Reserve Bank of India lends to the banking system, will continue to be at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.
"We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission.
"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said after unveiling the first bi-monthly monetary policy for financial year 2015-16.
RBI surprised the markets with two rate cuts of 0.25 per cent each outside the scheduled review meetings this year, but banks have yet to respond to these policy rate cut by lowering their lending rates.
After the policy announcement bankers said that most of them will have their asset liability committee meeting week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.
"We would see rates coming down as we see easing of interest rate cycle," SBI Chairperson Arundhati Bhattacharya said. Commenting on the RBI's action, Chief Economic Advisor Arvind Subramanian said: "It is on the expected lines."
"With the RBI choosing not to reduce the policy interest rate, demand revival in the economy and pick up in the investment cycle would remain a tall order," Assocham President Rana Kapoor said.
The ball is clearly in the court of the banks to rise to the occasion since credit off-take has remained weak despite front loading of the two rate cuts, he said.
Rajan expressed the hope that competitive pressure and comfortable liquidity position would encourage the banks to cut lending rates.
"Given that there has been very little transmission from rate cut so far...we are waiting to see transmission take place. I have no doubt that this will happen. If it happens sooner it is better for the economy," he told reporters.
"The Reserve Bank will await the transmission by banks of its front-loaded rate reductions... into their lending rates," said the policy statement.
The RBI said that it would maintain accommodative stance of monetary policy going forward.
Recent unseasonal rains and hailstorm have impacted rabi crops across North and Western India, raising fears of spike in food prices.
Retail inflation increased to 5.37 per cent in February from the 5.19 per cent for previous month, but many analysts expect it to continue to remain much below the RBI's January 2016 target of 6 per cent range.
Another factor which was supporting a rate cut included the range-bound core inflation, which is price rise without the food and oil components.
Other factors like food prices will also be monitored closely, Rajan said, adding that the impact of the recent unseasonal rains will also be monitored closely.