Supported by falling inflation rates, the Reserve Bank of India (RBI) is widely expected to keep its key lending rate, the repo rate, unchanged at 7.75% in its monetary policy review on Tuesday, temporarily warding off fears of an immediate hike in consumer and home loan EMIs.
India’s wholesale inflation rate eased to a five-month low of 6.16% in December on plunging vegetable prices, giving some reason to smile for the beleaguered UPA government ahead of national elections.
Retail inflation, a more realistic index that captures shop-end prices, also grew at a three-month low rate of 9.87% in December as fresh seasonal arrivals pushed down vegetable prices.
Status quo on borrowing costs will come as a relief for consumers, but business leaders have been clamouring for an interest rate cut as costly loans and raw materials are hampering their expansion and hiring plans.
Factory output contracted by 2.1% in November, mirroring declining investment activity.
Acccording to Aditi Nayar, senior economist at credit rating and research firm ICRA: "The moderation in headline consumer price inflation in light of the fall in industrial production in November has added to the case for a pause in the January policy".
Last month, RBI had unexpectedly kept the repo rate, the rate at which banks borrow from the central bank, unchanged at 7.75%, focusing on bringing down prices, which, going by the latest data, seems to have worked.
"With the noise in inflation data likely to abate, we do not expect RBI to raise the repo rate on January 28," credit rating firm Crisil said in a report.