As widely forecast, the RBI held the repo rate, its key lending rate, at 4% and kept the reverse repo rate, the borrowing rate, unchanged at 3.35%.
All 61 economists polled by Reuters late last month had said they see no change in the repo rate which has been steady at 4% since May last year.
"The need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave especially in the background of rising infections in certain parts of the country," RBI Governor Shaktikanta Das said in a virtual address accompanying the MPC's decision.
All members voted in favour of the decision to hold rates and a 5-1 majority supported retaining the accommodative monetary policy stance, Das said.
The RBI also announced four variable rate reserve repo (VRRR) auctions of a larger-than-expected quantum, one each fortnight, over August and September to restore normal liquidity operations and raised its 2021/22 inflation forecast to 5.7% from 5.1% before.
"This should not be misread as a reversal of the accommodative policy stance," Das told reporters, adding that the VRRR window is purely voluntary.
However, ANZ analysts said the higher than expected inflation revision, tightening of stance advocated by one member and the doubling of the size of VRRR auctions suggest the RBI has become less dovish.
"While India's overall monetary policy is and will remain supportive of growth, we should expect gradual progress towards policy normalisation," Dhiraj Nim and Sanjay Mahtur of ANZ wrote in a note.
To counter the economic fallout of the pandemic, the central bank pumped in massive amounts of liquidity through various measures like open market operations over the last year, leaving the banking system with an average surplus of around 6 trillion rupees ($80.87 billion).
Some traders saw the VRRR step as the start of RBI's liquidity normalisation and the eventual cash withdrawal phase, sending the benchmark 10-year bond yield up 3 basis points to 6.24%.
"RBI policy is hawkish at the margin. While there is no real change in the policy, bond market participants will take the nuanced change in language seriously," said Sandeep Bagla, CEO at investment management firm TRUST AMC.
RBI has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the health crisis and tough containment measures. This follows 135 bps worth of rate cuts since the beginning of 2019.
The consensus in the latest Reuters poll expects the RBI to deliver two 25-basis-point rate hikes in the next fiscal year, taking the repo rate to 4.50% by end-March 2023.
"We expect additional liquidity normalisation measures like overnight VRRR, increased quantum of higher tenure VRRR in the months ahead before expecting a reverse repo rate hike in December," said Upasna Bhardwaj, economist at Kotak Mahindra Bank.
($1 = 74.1960 Indian rupees)
(Additional reporting by Chris Thomas, Chandini Monappa, Abhirup Roy, Nupur Anand and Anuron Kumar Mitra; Editing by Shri Navaratnam)
By Swati Bhat