With lending rates in mind, all eyes on RBI’s next move
RBI Governor Raghuram Rajan had kept the interest rates unchanged in April. Helped by low inflation, central bank may cut rates tomorrow.business Updated: Jun 01, 2015 01:38 IST
If you plan to buy a house or a car, or if you are an existing home loan borrower, you would probably be keeping one eye on what the Reserve Bank of India (RBI) announces on Tuesday.
The RBI is widely expected to cut lending rates in its monetary policy review meeting as India’s policy makers seek to sustain budding recovery signs in Asia’s third-largest economy. RBI governor Raghuram Rajan had cut the repo rate — its key lending rate — by 0.50 percentage points in two tranches in January and March.
The government and the industry want a repeat action. “My views are well-known. It is (time),” finance minister Arun Jaitley said recently when asked if it was time for the RBI to cut interest rates.
Rajan had kept it unchanged in April but told banks in no uncertain terms that it was about time they start reducing interest rates to pass on two previous cuts to customers. Many lenders including in State Bank of India (SBI), ICICI Bank and HDFC Bank have announced cuts in their “base rates” in April leading to a fall in EMIs for some class of existing as well as new borrowers.
The repo rate — the rate at which RBI lends to commercial banks — now stands at 7.5%. A lower repo 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.
A lower repo 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 every month towards repaying housing loans. The central bank uses monetary tools to stymie demand and cool prices.
In times of weak growth and low prices, it is usual for RBI to cut interest rates to goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods.
India’s current retail inflation, the RBI’s main guide for interest-related decisions, stood at a four-month low of 4.87%, giving more room for the RBI to cut interest rates, which will lower EMIs, spur consumer purchases, cut companies’ borrowing costs and thus, aid investment.
“We expect the RBI to cut the repo rates by 25 basis points (0.25 percentage points) on June 2, followed by a prolonged pause until end-2016,” said Sonal Varma, an analyst at broking and research firm Nomura.
“We expect the RBI to reduce the repo rate by at least 0.50 percentage points to expedite revival of private investments and demand for housing, automobiles and consumer durables,” said Jyotsna Suri, president of Ficci, an industry body.
Also, the central bank will likely keep a close watch on the rains this year in the backdrop of the prediction of a ‘below-normal’ monsoon for the second consecutive year.