India’s central bank surprised on Thursday by keeping its interest rates unchanged.

Markets had widely expected a sixth rate cut from the Reserve Bank of India amid a notable slowdown in the Indian economy.

As things stand, the benchmark repo rate — the rate at which it lends to commercial banks — remains at 5.15%.

The Indian rupee weakened against the dollar, changing hands at 71.63 from an earlier level of 71.43. Indian stocks were mixed after the decision, with the Nifty 50 down 0.21% while the Sensex traded near flat.

In its policy statement, the RBI said the decision to keep the rate unchanged was in line with its objective of achieving its medium-term inflation target of 4%, with an upper and lower limit of 6% and 2%, respectively, while supporting growth.

The central bank reiterated it will maintain its “accommodative” stance as long as it is necessary to revive growth while ensuring that inflation remains within the target. It added that while there is “monetary policy space for future action,” it felt appropriate to pause at the stage in light of the current growth-inflation dynamics.

Economists have questioned the efficacy of the RBI’s aggressive rate cuts this when much of that did not appear to have been transmitted back to the economy, especially in the credit market. Inflation is also ticking up due to rising food prices.

Prior to Thursday’s move, the central bank had already cut the repo rate by 135 basis points since January to try and stem the slowdown in economic growth over recent quarters.


Economic slowdown

RBI also revised down its GDP forecast for the full fiscal year that ends in March 2020 from 6.1% predicted in its October policy to 5% on Thursday.

“While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks,” the RBI said in its policy statement.

Data released last week revealed India’s economic output expanded by 4.5% in the three months that ended in September, marking the slowest pace of growth since 2013.

The slowdown in India has been more severe than what market watchers anticipated a year ago and it is driven by a mix of both cyclical and structural factors, according to Sonal Varma, chief economist for India and Asia ex-Japan at Nomura.

Aside from a slowdown in consumption, investments in India have weakened over time.


Balance sheet problems

Corporations and banks are undergoing a balance sheet deleveraging cycle to clean up bad debt from their books, Varma told CNBC’s “Street Signs” before the RBI’s decision. Adding to that is the ongoing crisis in the shadow banking sector where non-bank financial companies are facing similar balance sheet problems.

“What the shadow banking crisis does is basically add one more entity to this balance sheet deleveraging cycle. So, you have a triple balance sheet problem now,” Varma said. She added that monetary policy easing will ultimately help segments that want to grow — the consumers. “If you want a more durable recovery, you want investments to pick up.”

That would take a longer time to materialize until the root cause of a confidence crisis is fixed, she explained. Liquidity is not a problem, according to Varma. Instead, credit risk is an issue where lower-rated corporations are finding it more difficult to secure cheaper loans either from banks or non-bank financial companies.

Varma said that worries of stagflation — a situation where inflation is high but growth is low, which leaves policymakers in a bind — are a short term issue. Apart from increasing food prices, there have been a few other shocks to the economy including a “40% hike in telecom tariff, so, we do think that near-term inflation is going to get close to the upper end of the central bank’s target.”

Still, the RBI needs to determine if the inflation is transitory and according to Nomura, it is.

“The underlying core inflation is still very much contained,” Varma said.