Reserve Bank of India (RBI) governor Raghuram Rajan kept lending rates unchanged on Tuesday, withstanding mounting pressure from industry leaders and belying the government’s hopes that he would lower borrowing costs to aid an incipient economic recovery.
A status quo on interest rates would imply that your monthly loan payouts (EMIs) are unlikely to fall soon despite recent moderation in inflation rates.
Ahead of the festival season, high loan rates could influence people’s decision to buy houses, cars and other consumer goods mostly bought through loans.
Rajan retained the repo rate—the rate at which banks borrow from RBI — at 8%, and kept the cash reserve ratio (CRR) — the proportion of deposits that banks have to park with the central bank—at 4%.
Budding revival signs in the broader economy and falling inflation rates had rekindled hopes that the bank would lower loan rates. RBI has forecast India’s GDP to grow by 5.5% in 2014-15, and by 6.3% the year later, endorsing a growing body of expert opinion that the Indian economy is climbing out of its deepest slump in 25 years.
RBi interest rates unchanged, growth projection at 5.5
Industry leaders have been clamouring for cheaper loans. The government has also expressed hope that the central bank would signal a reversal of its prolonged hawkish stance that is seen as affecting growth.
Rajan, however, made it clear that the RBI would not compromise on its commitment on price control till it is convinced that inflation is fully tamed.
“With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly,” Rajan said.
While higher crude oil prices will have a knock on effect on inflation, it also can weaken the rupee as demand for dollars go up to meet import payments.
Retail inflation eased in August to 7.8% year-on-year from 7.96% the previous month, latest price data showed, although that is still above the central bank’s target of 6% by 2016.
The RBI governor said that the key to a turnaround in the growth path of the economy in the second half of the year is a revival in investment activity — in new as well as stalled projects — supported by fiscal consolidation, stronger export performance and lower overall inflation."The recent cautious optimism that is building in the economy on the back of improved business sentiment needs to be placed on solid foundations through a step-up in investment," Rajan said.
Financial services secretary G S Sandhu today said “RBI fully understands needs and expectation of markets, so they will take a view (on cutting policy rates) when the time is right”.
Business leaders did not hide their disappointment. “Hopefully, the RBI would turn more accommodative in the near future,” Confederation of Indian Industry (CII) director general Chandrajit Banerjee said.