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RBI may hold key rates to check price pressures

Reserve Bank of India (RBI) governor Raghuram Rajan is likely to maintain a status quo on key interest or repo rate at the monetary policy review on Tuesday.

business Updated: Feb 01, 2016 23:26 IST
Beena Parmar
RBI
Reserve Bank of India (RBI) governor Raghuram Rajan is likely to maintain a status quo on key interest or repo rate at the monetary policy review on Tuesday.(AFP File Photo)

Reserve Bank of India (RBI) governor Raghuram Rajan is likely to maintain a status quo on key interest or repo rate at the monetary policy review on Tuesday, ahead of the Union Budget, mainly due to challenges from high food-driven inflation, bankers and economists said.

So EMIs on home, auto and consumer loans are unlikely to come down soon.

Repo is the rate at which banks borrow from the RBI. It currently stands at 6.75%.

Both wholesale price index (WPI)-based inflation and consumer price index (CPI)-based inflation have shown an upward trend in the past four months due to a rise in prices of pulses and other grains. Wholesale inflation stood at (-)0.73% in December, while retail inflation moved up to 5.61%.

“The RBI has in the last one year (since January 2015) cut policy rates by 125 bps to 6.75%, even in-between polices. There are expectations of further easing of rates; however they are likely to be timed after monitoring of the domestic and global conditions,” research agency CARE ratings said in a report.

Transmission of earlier rate cuts is another key issue.

In 2015, despite the 125 basis point (bps) rate cut by the RBI, banks were able to reduce lending rates by just 56-60 bps. But they have cut down deposit rates more aggressively to maintain profitability, said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.

However, a Bank of America-Merrill Lynch (BoFA-ML) Global Research report said it “continues to expect” the RBI to cut the key rate by 25 bps in the February policy review to boost growth.