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The clamour for a status quo on key policy rates in RBI’s mid-quarter review of monetary policy in December has risen on expectations of a decline in core inflation amid hope of the positive effect of the monsoon on growth data.
In a scenario where the appetite to lend has been low, a status quo on the repo rate, the rate at which banks borrow from the RBI for immediate liquidity needs, is likely to provide some relief to banks.
The repo rate is currently at 7.75 per cent. A higher rate is likely to have negative impact on banks’ margins. The RBI is due to announce the policy review on December 18.
RBI Governor Raghuram Rajan said last week: , “I am somewhat more heartened by the outcome of core CPI inflation, which declined to 8.1 per cent from 8.5 per cent in September. The momentum for core inflation is also on the decline.”
He had said the RBI will watch the incoming data carefully, especially looking for the effects of the harvest on food prices, fuel price increases and exchange rate depreciation, before taking further decisions on interest rates. Last month, the RBI hiked the key lending rate by 25 bps to 7.75 per cent citing high inflation concerns.
Following this, banks such as State Bank of India and HDFC bank raised their base rate or the minimum lending rate, which, in turn, increased the equated monthly instalments on loans taken by its customers.
Rajan said: “Markets are worried about what these data mean for policy rates. As I have said before, the RBI is concerned about the weak economy as well as high inflation. We believe the weak economy, increases in food supply, and recent policy rate hikes will provide a dis-inflationary impetus over time.”
“Hence, a repo rate hike in the December policy is not imminent. We expect one rate hike this fiscal, which could be in Q4. RBI may skip the (hike in the) December policy,” said Shubhada Rao, Chief Economist at Yes Bank. RBI has been consistently emphasizing on the need to break the spiral of rising price pressures in order to anchor inflation expectations, Rao added.
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