RBI Maintains Status Quo

In its policy meet on 5th April 2018, the Reserve Bank of India (RBI) decided that it would leave prevailing interest rates in the country as they were.

There are three types of rates and all of them were retained. The repo rate, the rate at which the central bank lends to all commercial banks in the country, will be kept at 6%. The other rates are the reverse repo rate, which will be 5.75% and the Marginal Standing Facility (MSF), which will stay at 6.25%.

For the uninitiated, the reverse repo rate is the rate at which the RBI borrows money from banks while the MSF is the rate at which banks borrow overnight funds against securities from the RBI.

So, if interest rates in the country remain unchanged, banks may not cut deposit or lending rates in the near future.

But, why did the RBI decide to keep the rates unchanged? There are several reasons with inflation being the most important of them all. According to the RBI’s policy statement, “With the sharp moderation in food prices in February-March, the inflation trajectory in H1:2018-19 is expected to be lower than the projection in the February statement.”

Does this help you?

Not really, because banks and lending institutions have cut lending rates significantly in the last few months. So, further rate cuts are not expected. The interest-rate cuts that have been happening for the last two years are finally being passed on to borrowers. Fixed Deposit rates were cut much earlier than loan rates. Now, loan rates have fallen in line with the interest rates in the country and some banks have even hiked lending rates.

However, note that you can take advantage of lower rates only if you have floating-rate loans. These are loans that will be reset when the RBI changes interest rates in the country. So, going for a floating rate will benefit borrowers in the present interest-rate scenario. Many loan rates, especially that of Home Loans, have come down significantly. You can get a Home Loan for as low as 8.3% if you are a new borrower. Lower rates for other loans such as Car Loans and Personal Loans are also available now.

If you are someone who invests in bank Fixed Deposits, then, you needn’t worry. Since banks have started hiking Fixed Deposit rates this year, you can expect better interest rates. Fixed Deposit rates now range between 7% and 8% per year.

Experts Speak

Curious about what industry experts are saying about the latest monetary policy?

Arvind Chari, Head – Fixed Income & Alternatives, Quantum Advisors

“The RBI by lowering its inflation estimate for FY 19 has signalled a shift in its monetary policy outlook for the rest of the year. In the last 4 months, the RBI was seen to be hawkish and worried on the inflation trajectory.  But its language in the monetary policy statement and during the post-policy press conference suggests to us that the RBI is not unduly worried about the oil prices and MSP (minimum support price for farm produce) increases. The MPC (Monetary Policy Committee) of the RBI now expects the headline CPI inflation to be 4.7%-5.1% in the H1 (April-September 18; lower by 0.5%) and 4.4% in H2 (lower by 0.1%).  These are markedly lower estimates than the one made just two months prior in the February MPC meeting.

Although no clear explanation was given for the lower estimates, it seems to have been driven by the lower inflation readings of January and February which was driven largely by the fall in vegetable prices.”

Dhananjay Sinha, Head-Institutional Research, Economist and Strategist, Emkay Global Financial Services

“RBI maintains status quo on policy rates as well as on its neutral stance – repo rate at 6.0%, reverse repo at 5.75% and MSF at 6.25%. RBI has toned down its earlier hawkish tone by lowering the inflation projection and raising the GDP growth projection to 7.4% in FY19. However, the underlying risks to inflation still continue to be dominated by domestic factors and spillover from the global trade hostilities. Going forward, RBI might recalibrate its inflation projections, thereby reinstating its earlier hawkish view. Therefore, we maintain that the next move will be a reversal of the Aug’17 rate cut of 25bps. ”

Chanda Kochhar, MD & CEO, ICICI Bank

“The significant positive in the monetary policy was the downward revision of inflation projections.  The MPC also recognized that the structural reforms undertaken by the Government and the pickup in credit growth are leading to a broad-based cyclical improvement in the economy. The MPC has prudently voiced concerns about the possible interplay of domestic and global risk factors that could play out over the medium term. The announcement of regulatory measures like the mandatory loan component in working capital financing is a step in the right direction. Allowing non-residents into swap markets and introduction of Rupee swaptions would deepen the domestic derivative market, while also aiding product development to enable better risk management by domestic entities.”

Pankaj Pathak – Fund Manager, Fixed Income, Quantum AMC

“The RBI by lowering its inflation estimate for FY 19 has signalled a shift in its monetary policy outlook for the rest of the year. In the last 4 months, the RBI was seen to be hawkish and worried on the inflation trajectory.  But its language in the accompanying statement and during the press conference suggests to us that the RBI is not unduly worried about the oil prices and MSP increases.

Market expectations of any rate hikes will be dialled back post this policy and hence bond yields will remain supported on the back of already announced reduction in bond supply in H1 Fy 19.

We remain a bit surprised on the flip-flop of the RBI on its overall inflation projections and specifically its treatment of HRA allowance for its inflation projections and do have a feeling that the ‘dovishness/softness’ in its statements could well have been brought about by the need to manage bond yields  and maintain the positive sentiment in the bond market.”

Radhika Rao, India Economist, DBS Bank

“The RBI backed its neutral stance by a downward revision to the inflation forecasts (excluding HRA) but expressed more conviction that GDP growth has bottomed out and is likely to gain momentum this year. Marking a notable shift from the Minutes of the February meeting – April’s tone was less cautious than markets anticipated, which might see swaps shake-out expectations of imminent policy tightening. On inflation, the June to December 2018 quarters are likely to distorted by statistical factors – base effects and fading impact of one-off catalysts same time last year, with a true underlying picture likely to emerge into 2019.

We expect inflation to remain above target this year, but not test past the higher band i.e. 5-6% levels in a sustained fashion. Overall, today’s tone and direction prompts us to maintain our call for benchmark rates to be kept steady in 2018. Policymakers will nonetheless remain mindful of an increase in inflationary expectations on the back of MSP increases, high domestic fuel prices and global uncertainties (heightened trade war concerns, rupee volatility), keeping them on a balanced path.”

Ramesh Nair, CEO and Country Head, JLL India

“Keeping the policy rates unchanged with REPO rates kept at 6% and reverse REPO rate 5.75% was expected given the unwavering market conditions in the last couple of months. The inflation index has remained stable at 4.4% and below RBI’s last outlook which is one of the key factors to keep lending rates unchanged. The RBI is also taking time to evaluate the market impact of developments like increased global crude prices, a hike in US Fed Rates etc. that could have an impact on the Indian market in the coming months.  Also, ambitious government projects like healthcare insurance and hike in MSP for agricultural produce will need higher government reserves. A critical decision factor would be the outlook for monsoons and the monsoons itself that in the next 3- 4 months, will bring out the true economic picture for India for this financial year. 

For the real estate sector, which has aligned to the government’s ambitions, was looking for some encouragement that would move the needle towards accelerated growth. The apex bank could have directed the lenders to keep the MCLR below 10% or put a cap on the same for home loans. Currently, it is observed the MCLRs are higher by 10% – 12% in most leading retail lending banks. This could have brought down the effective lending rate for home loans.  Already by linking MCLR to lending rate changing the earlier base rate has made the cost of borrowing home loans higher in the short term.”

Additional Reading: What Exactly Does The RBI Do?

So, keep checking with your lender to see if they have lowered their interest rates. If you are a new borrower, ensure that you compare across lenders to get the best interest rates and terms. If you want the best loans, you know where to go.