BI interest rate expected to fall slightly in early

In its fifth bi-monthly monetary policy review of the current fiscal conducted by Reserve Bank of India Governor Raghuram Rajan here, the repurchase rate at which short-term credit is extended to commercial banks was left unchanged at 6.75 percent. At present, the repo rate is 6.75 per cent per annum and the reverse repo rate is 5.75 per cent.

RBI Governor Raghuram Rajan sprang no surprises on Tuesday, keeping key policy rates unchanged. Using this space for further accommodation, the bank expects inflation at around 5% by March 2017. Rajan said there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 per cent reduction announced so far during 2015.

“The focus has now shifted to the transmission of lower policy rates to banks’ lending rates”. Also, the government is examining linking interest rates on small saving schemes to market rates.

The RBI will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to.

Responding to a query on growth projections and its decision not to lower rates this month, Rajan said: “The RBI is not against growth, we will ensure sustainable and the maximum growth that we can get”. Consumer price index-based inflation, or the retail inflation was at a four month high in October – at 5 per cent.

In the last policy, RBI had said inflation was expected to reach 5.8 per cent by January 2016.

“Taking all this into consideration, inflation is expected to broadly follow the path set out in the September review with risks slightly to the downside”.

According to RBI, the economy is in early stages of recovery.

Whether consumer inflation stays within its target of 2 to 6 percent will be crucial, though the RBI has also said it needs Prime Minister Narendra Modi’s government to control its fiscal deficit and push economic reforms.

Analyst Arun Singh said the RBI had also chosen to wait to see whether the US Federal Reserve would hike rates later this month, as expected, before cutting again. “The marginal cost will allow them to move much more quickly and react to the competition that is there in the market”, Dr Rajan said.

Banks have been putting pressure on both the RBI and the government to reduce interest rates on small savings products to enable banks to be more agile in reducing interest rates on deposits when the central bank cuts the rate at which it lends to banks (called repo rate in banking parlance). Yet the path ahead for the RBI’s monetary policy is tricky, given domestic regional disparities and global macroeconomic uncertainties.