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No cut yet, consumers to suffer higher rates

In line with expectations, the RBI on Thursday decided to keep key interest rates unchanged in its mid-quarter monetary policy decision. HT reports. Numbers talk economic wellbeing

business Updated: Mar 16, 2012 02:52 IST
HT Correspondent

Consumers already reeling under high inflation get no respite from high interest rates as the Reserve Bank of India (RBI) on Thursday left the policy repo rate (the rate at which banks borrow money from RBI) and the reverse repo rate (the rate at which the RBI borrows from the banks) unchanged at 8.5% and 7.5%, respectively.

A cut in repo rate would have led to the reduction in lending rates as it would lower the cost of funds for the banks.

For consumers, it means they will have to bear elevated interest rates on their home loans, which average 12-14% now, for some more months.

"Upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippage and rupee depreciation," said D Subbarao, governor, RBI, in the mid-quarter review of monetary policy. "Besides, there continues to be significant suppressed inflation in fuel, fertiliser and power as administered prices do not fully reflect the costs of production."http://www.hindustantimes.com/Images/Popup/2012/3/16_03_12-buss23b.jpg

For the last two years, the central bank has been struggling to control inflation that remained near double digit for most of 2010 and 2011.

According to the governor, going forward the decision to cut rates will depend on the course of inflation. Although the RBI has postponed the rate cut this time, it has given indication that going forward policy rates are expected to fall, which is a good sign for the economy which is facing slowdown concerns.

"Recent growth-inflation dynamics have prompted RBI to indicate that no further tightening is required and that future actions will be towards lowering the rates," said the governor.

India's economic growth slowed to 6.1%, weakest number in three years, in the three months to December.

"When the cost of funds is high for the banks, the question of lending rate cuts does not arise," said JP Dua, chairman and managing director, Allahabad Bank.

"Banks will wait till next policy before cutting lending rates as cost of funds for the banks is high," RK Bakshi, executive director, Bank of Baroda. The next policy review is on April 17.

Last week, RBI announced a cut in Cash Reserve Ratio (CRR) - the proportion of deposits banks have to park with the central bank - by 0.75 percentage points in order to ease tight liquidity situation in banking system in order to inject Rs 48,000 crore into the banking system.