All eyes on Rajan for rate cut move, borrowers await EMI fall | business | Hindustan Times
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All eyes on Rajan for rate cut move, borrowers await EMI fall

business Updated: Apr 05, 2015 22:33 IST
HT Correspondent
HT Correspondent
Hindustan Times
Reserve Bank of India


If you plan to buy a house or a car, or if you are an existing home loan borrower, you would probably be keeping one eye on what the Reserve Bank of India (RBI) governor Raghuram Rajan announces on Tuesday.

In surprise announcements, the central bank had cut the repo rate - its key lending rate - by 0.50 percentage points in two tranches in January and March.

Industry groups have been ratcheting up their demand for a repeat action, although RBI could keep lending rates unchanged in its monetary policy review.

The repo rate, the rate at which RBI lends to commercial banks, now stands at 7.5%. A lower repo brings down banks' borrowing costs, which in turn, prompts them to slash interest rates for final home, auto and corporate borrowers.

Two sets of data in the next 10 days - industrial output growth for February and consolidated inflation data for March - would largely determine RBI's next move on interest rate hikes as policy makers look for options to contain food prices, boost investments and spur consumer goods' sales to spur the broader economy's growth.

Rajan may also closely observe the trends in food inflation, particularly in the context of severe damage to crops caused by an unseasonal spell of hailstorms across several states that has devastated ripening winter-sown crops and delayed harvests.

India's retail inflation rate, which acts as RBI's main guide on interest rate-related decisions, rose to 5.37% in February driven by higher food prices, including vegetables, bringing it closer to the central bank's tolerable threshold of 6%.

Food inflation, a measure of how costly the platter has become over a 12-month period, rose 6.79% in February from 6.14% in January. With unseasonal rains damaging crops, food inflation will likely be higher in March, with vegetable prices going up.

If inflation rates remain benign, analysts expect RBI to reduce lending rates by 0.75 percentage to 1 percentage points during the year.

"We believe the key to determining the magnitude of rate cuts will be the inflation trajectory. Based on our expectation of the inflation trajectory (of 4.75% by 2015-end), we believe RBI could lower rates by a further 0.75 to 1 percentage points in 2015," investment bank Morgan Stanley said in a recent research report.