RBI monetary policy review – Rates unchanged on expected lines!

By | September 30, 2014

 Interest Rate

RBI Governor Raghuram Rajan announced the fourth bi-monthly monetary policy today keeping the repo rates unchanged as per expected lines. The governor made it clear that inflation remains to be one of the biggest challenges as RBI has set a target of achieving a rate of 6% CPI by January 2016.Some financial experts had earlier hoped that the drop of wholesale inflation figures to its five year lows may offer a case in point for a possible rate cut in the announcement. Addressing the press RBI governor made it clear that any change in repo rates with inflation mongering at upside of the 6% inflation target is risky as it can deflate the regular improvement in the inflation.

Overview of Unchanged Rates:  With the RBI announcing no changes in the repo, reverse repo and SLR rates, the repo rates continue unchanged at 8 percent. The premier bank has also retained the short-term borrowing or reverse repo rate at 7 percent. The statutory liquidity ratio (SLR) rates, the portion of deposits that banks are required to keep in government bonds have also been unchanged as is the cash reserve ratio (CRR) which remains at earlier levels of 4 percent.

Impact of the RBI Policy on Common Man: As a direct impact of the RBI policy announcement of unchanged repo rates any loan installments are unlikely to come down this festive season. For industries, especially the manufacturing sector, the impact is likely to be a little stiffer as the long pending demand of decrease in interest rates to facilitate growth is also unlikely to manifest. On the positive side however, the regular decrease in consumer prices that were negatively impacting the household budget of each income group have showed signs of cooling off substantially.

The consumer price inflation has slowed in August with core inflation at 7.8 per cent. This is largely a barometer of the food and fuel prices including LPG and CNG eased to 6.9 per cent. The decrease in both consumer price inflation and core inflation is likely to offer a relief for the common man as far as daily expenditure is concerned. Once the RBI achieves its target of brining CPI under 6% levels, a change in repo rates and CRR is likely to offer good news for loan seekers as well as existing loan borrowers in the coming months.

The Road Ahead: While the industry has been seeking rate cut to boost growth in the business and industrial sector, the RI governor has made it clear that he is seeking a long term sustainable solution to control the menace of inflation altering rates only when the core fundamentals of the economy are strong. Most financial experts have showed faith in the RBI governor’s plan to control inflation before changing repo rates. While the inflation has cooled off, it has certainly not reached a level where the macro and micro economic parameters can safely presume that inflation would not come back to haunt in the short term. If the same trends continue, the next RBI monetary policy can surely see a positive announcement for both industry as well as loan borrowers.

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