Will the RBI cut lending rates in monetary policy review?

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Aug 02, 2015 23:33 IST

Home loan borrowers, companies, policy makers and the market analysts all have one question in mind: Will the Reserve Bank of India (RBI) governor Raghuram Rajan cut lending rates in the monetary policy review on Tuesday?

More than rates, however, analysts will also keenly follow Rajan’s phraseology in wake of the recent controversial suggestion to remove the RBI governor’s veto power to decide on interest rates under a proposed new monetary policy committee.

A new report has proposed a seven-member committee, including four members picked by the government, to vote on interest rate decisions. This has kicked up a storm with many experts arguing that a government-elected panel will undermine the RBI’s independence and severely dent the central bank’s independence.


Rajan has cut the repo rate by 0.75 percentage points in three tranches since January.

In June, the RBI cut its main lending rate — the repo rate — by 0.25 percentage points to 7.25%, but corporate and individual borrowers will be hoping for a repeat action.

A lower repo rate will bring down banks’ borrowing costs, which in turn, may prompt them to slash their “base rates”, the floor interest rate on which lending rates for final home, auto and corporate borrowers are fixed. It can lead to lower floating home loan rates, which move in tandem with base rates, and bring cheer to consumers, who have been paying large chunks of their income as EMIs towards repaying housing loans.

India’s retail inflation rate rose to an eight-month high of 5.40% in June driven by higher food prices, although a cheaper fuel may help contain rise in prices.

Experts were divided on the RBI’s likely move on Tuesday.

“Consumer price inflation seems likely to undershoot the RBI’s projection of 6.0% in January 2016, brightening the prospects of a repo rate cut of 25 basis points (0.25 percentage points) during the ongoing quarter, provided that food prices remain in check,” said Naresh Takkar, group CEO and MD, ICRA.

In February, the government and the RBI announced that they have agreed to adopt a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.

Under the new system, the RBI has set a new retail inflation target of below 6% by January 2016 and 4% by March 2017.

Some other experts said the RBI will likely maintain a status quo on rates. “The RBI is likely to wait and watch on rates,” said Sunil Kumar Sinha, director (public finance and principal economist), India Ratings and Research.

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