RBI maintains status quo on key rate; no moderation in EMIs

Home and auto loans will not become cheaper as the Reserve Bank kept the policy rate unchanged for the fifth time in a row today, but hinted at softening of its stance "early next year" if inflation continues to abate and there is an improvement in fiscal health.

The decision to keep the short term lending (repo) rate unchanged at 8 per cent disappointed the industry which said RBI Governor Raghuram Rajan in his fifth bi-monthly policy statement could had been more accommodating to help prop up the sagging economy.

"A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle," he said.

The repo rate continues to be at 8 per cent while the cash reserve ratio has also been retained at 4 per cent.

Following the policy announcement, most of the bankers said that there will be no change in lending and deposit rates for now.

United Bank of India Executive Director Deepak Narang said the margins of banks are already under pressure due to high level of non-performing assets (NPAs) or bad loans.
"So, I don't see a cut in the interest rate at the moment," he added.

Following the RBI stance, the BSE's 30-share index Sensex closed at 28,444, down 115.61 points or 0.40 per cent.

On the inflation trajectory, Rajan said he expects it to ease further and average at the 6 per cent.

"Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through," he said in the bi-monthly review of the monetary policy.

Driven largely by a base-effect, the consumer price inflation for October had come in at 5.52 per cent, the fifth consecutive month that it declined.

Poor showing by agriculture and manufacturing sector pulled down the country's economic growth rate to 5.3 per cent in the second quarter, as against 5.7 per cent in the April-June quarter of the current financial year.

Under its glide path, the RBI is targeting to get the CPI inflation at 8 per cent as of January 2015 and take it down to 6 per cent by January 2016. While the 2015 target is achievable, Rajan had in the last policy sounded concerned about the "upside risks" to the 2016 target.

Central forecast for retail inflation is revised downward to 6 per cent from 8 per cent for March 2015.

Calls for a rate cut had been growing in the run up to the policy announcement, with Finance Minister Arun Jaitley also pitching for lowering the cost of capital to boost growth.

However, the surprising rebound displayed with a 6.3 per cent growth in the core sector yesterday - indicating an uptick in factory output - had kept everybody guessing about the stance which Rajan adopts.

Additionally, the auto companies also reported an over 10 per cent growth in sales for November, after a dip in the preceding month, indicating a revival in the manufacturing sector. Among the eight core sectors, coal and power have done exceedingly well during the month.

The lobby calling for a rate cut had also been pointing to a continuous decline in global crude prices, which have come to a 5-year low of around USD 68 a barrel, which has the potential to reduce inflation in an oil-importing nation like India.

However, some experts also warn of uncertainty continuing over oil pricing, saying that any geo-political tension will send the prices up again.