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Will RBI announce a cut in interest rates?

HT Correspondent, Hindustan Times  New Delhi, September 16, 2012
First Published: 21:30 IST(16/9/2012) | Last Updated: 10:55 IST(17/9/2012)

After the government's reform announcements last week, home loan borrowers, business leaders, economists and policy makers all seem to have one question in common: Will Reserve Bank of India (RBI) governor D Subbarao do an encore and announce a cut in interest rates on Monday?

Elevated inflation, at 7.55% in August, has made the task difficult for Subbarao.

Experts tracking the economy, however, do not expect RBI to oblige with a rate cut and would rather wait to see how costlier diesel, whose price was raised by Rs. 5 a litre last week, and extra liquidity from the US stimulus measures (QE3) knocks up prices in India.

"The RBI is likely to wait and factor in the implications on domestic inflation out of QE3- driven rally in global commodity prices. Last week's diesel price hike would also add to the pressure on inflation," said Indranil Pan, chief economist at Kotak Mahindra Bank.

In July, RBI had kept the repo rate unchanged at 8%.

A higher repo pushes up banks' borrowing costs prompting them to increase interest rates for final home, auto and corporate borrowers.

High inflation had prompted the RBI to keep interest rates high to suppress prices.

"If the RBI were to evaluate the impending risks on inflation, it may still have an upper hand and RBI will be forced to postpone rate cuts further," said Deepali Bhargava, chief economist and Espirito Santo Securities.

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