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HindustanTimes Sun,31 Aug 2014

First innings: Will Rajan cut rates? Wait till 11am to find out

HT Correspondent, Hindustan Times  New Delhi, September 20, 2013
First Published: 02:12 IST(20/9/2013) | Last Updated: 08:10 IST(20/9/2013)

All eyes will be on Reserve Bank of India (RBI) governor Raghuram Rajan as he presents his maiden credit policy on Friday, after the US Federal Reserve infused much-needed breathing space to policy makers across world by delaying the unwinding of the monetary stimulus programme.

Analysts do not expect Rajan to cut lending rates soon. So, don't expect EMIs on your existing home loans to come down in a hurry.

There will also be more focus on the accompanying policy observations, which the market and economists will scrutinise closely for Rajan's assessment of the current economic situation and any forward-looking cues

Rajan had famously predicted the global financial crisis of 2008 three years before it happened.

Skyrocketing onion and vegetable prices and costlier staples such as rice pushed India's wholesale inflation to 6.10% in August, have added to the matrix of problems for the government and the RBI, which are battling to steer the country out of an economic mess.

High inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth, which slowed to a four-year low of 4.4% in April-June 2013.

Ahead of the festival season, high borrowing costs will likely dampen purchases of cars and other consumer goods, which are mostly bought through loans.

Analysts expect Rajan to partially roll back the tight-money policy by reducing the marginal standing facility (MSF) from 10.25% by about a percentage point to 9.25%, but the keep the benchmark lending rate-repo rate at which it lends to commercial banks-unchanged at 7.25%.

MSF is the rate at which banks borrow from RBI during periods of acute liquidity shortage using their statutory liquidity ratio securities as collateral.

In July, the RBI moved in to check speculation in the currency market and fixed a daily limit on how much banks can borrow from the central bank.

If a bank requires more funds, it can borrow emergency money using the MSF at 10.25% against the earlier 8.25%.

"The key inflationary wild card remains a potential hike in regulated fuel prices. A near 10% hike in diesel prices to ease its oil subsidy burden, which if approved, would add around 0.5 percentage points to headline wholesale inflation," Mole Hau, of BNP Paribas said in a research report.

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