MUMBAI: The Reserve Bank of India surprised investors for the third time in a row by keeping interest rates unchanged, citing inflationary pressures. Markets fell in the immediate aftermath with widespread expectations of a rate cut having been dashed but recovered subsequently.The monetary policy announcement marked a key shift in stance.“The (monetary policy) committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” RBI said.The central bank also announced a relaxation in withdrawal limits for savings accounts to Rs 50,000 per week starting February 20 and abolition of limits from March 13. The current limit is Rs 24,000 per week for savings accounts.RBI kept the repo rate, at which it lends to banks, unchanged at 6.25% after reducing it twice in the current financial year, which has led to a substantial fall in overall market yields. The majority of market participants in an ET poll had expected RBI would lower the policy rate by 25 basis points.The language suggested RBI was focused on targeting inflation and has adopted a more hawkish position.“The committee remains committed to bringing headline inflation closer to 4.0% on a durable basis and in a calibrated manner,” RBI said. “This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky.”Comments by RBI officials at the press conference indicated that the central bank will evaluate the effects of demonetisation and how transient they are before taking a call on the direction of policy.Inflation pressures will stem from global oil prices, global financial market developments and the effect of house rent allowances, RBI said. Also, non-food, non-fuel inflation has been stubborn, governor Urjit Patel pointed out.It forecast inflation in the second half of FY18 at 4.5-5%. GVA for the current fiscal year was pegged at 6.9% versus the earlier 7.1% estimate. It estimated GVA for FY18 at 7.4%.Investors had been building up expectations for a reduction based on the need to revive economic growth, which has taken a knock with the demonetisation of high-value currency in early November that crippled demand for consumer goods. Furthermore, the government said it would only miss its fiscal deficit target marginally. This had been expected to persuade the central bank that government spending would not be inflationary.Given that market rates have fallen substantially since demonetisation was announced on November 8, the central bank may have elected to keep its powder dry just in case there is a need to push up demand for loans.Also, the drop in market rates in the past year has exceeded cuts made by the central bank in the policy rate, encouraging companies and borrowers to seek bank funding.Bond yields have declined about 100 basis points from 7.5% last April to about 6.45. A basis point is 0.01 percentage point. The best rates offered to customers based on the marginal cost of funds based lending rate ( MCLR ) have fallen by about 107 basis points to an average of 7.98% from 9.05% in April 2016.Retail inflation, a key trigger for rate actions, has been in line with RBI’s 5% target for March end. The consumer price index dropped to 3.4% in December from 6% in July 2016.