Rajan retains key rates, nudges banks to pass on earlier cuts

The Reserve Bank on Tuesday left its policy rates unchanged, as was widely speculated, and promised more easing when permitted within its key task of keeping inflation under check, even as Governor Raghuram Rajan nudged the banks to pass on the benefits of earlier cuts to borrowers.

“We are in accommodative stance”, he said.

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

Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent, he said.

“Our worry is that competition should not come in the way of banks passing on more lending rate cuts to customers”. Besides inflation, the impact of the Seventh Pay Commission and external factors like the US Fed’s decision on interest rates will influence the RBI.

Rajan unexpectedly cut rates by a total 0.5 percentage point in January and March, outside of the RBI’s scheduled rate-setting meetings.

“The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to”, it said. For instance, since January 2015, RBI has cut lending rates by 125 basis point, but banks have lowered lending rates by just about 60 basis points till now.

“The RBI will keep a watch on the recent inflationary path and the likely impact of geo-political tension in Europe on crude prices”, said Shakti Satapathy, assistant vice president at AK Capital Services.

A survey of 47 economists by Bloomberg had overwhelmingly predicted Rajan would hold rates after he surprised analysts in September with an aggressive 50-basis-point reduction, suggesting there would be little room for further easing in 2015. Back in September CPI inflation was at just 4.41 percent; however, according to the latest data released by the Indian Ministry of Statistics & Programme Implementation (MOSPI) a provisional inflation figure of 5.00 percent in October was reported.

RBI has kept the GDP target unchanged at 7.4% for fiscal year 2016 and retail inflation target at 5% for March 2017.

“We continue to expect RBI Governor Raghuram Rajan to cut a final 0.25 per cent on February 2”, it said in a note.

Apart from this, it said the lending rates are expected to continue to be high, which is evident through the hardening of the benchmark yield, that may again result in some rate action. The central bank has expressed strong confidence in the government’s commitment to fiscal consolidation.