Raghuram Rajan's RBI keeps interest rates on hold, inks status quo for bank loan EMIs

Written by Press Trust of India | Updated: Apr 2 2014, 01:23am hrs
Raghuram RajanAccording to bankers, interest rates are likely to remain unchanged and there will be no immediate impact on EMIs after Raghuram Rajan invoked inflation to spike any chance of rate cuts. (Reuters)
EMIs for housing and car loans are likely to remain unchanged after Governor Raghuram Rajan's Reserve Bank of India (RBI) today maintained the status quo on the key policy repo rate, as was widely expected, and said there are risks to inflation.

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The Raghuram Rajan's RBI, in its first bi-monthly monetary policy statement, left the short-term lending rate, or repo rate, unchanged at 8 per cent and the cash reserve ratio static at 4 per cent.

It halved the overnight call money rate to 0.25 per cent and increased the 7-day and 14-day repo limits to 0.75 per cent from 0.50 per cent.

"At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy," said RBI Governor Raghuram Rajan.

For the first time since taking over in September, Raghuram Rajan did not surprise the markets and kept rates unchanged, as predicted by most analysts.

"Excluding food and fuel...retail inflation remained sticky around 8 per cent. This suggests that some demand pressures are still at play," the Raghuram Rajan said.

If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, the Governor promised there won't be any rate hikes.

According to bankers, interest rates are likely to remain unchanged and there will be no immediate impact on EMIs.

"Interest rates are likely to stay where they are now for some time. Life would be as usual for some time to come," Punjab National Bank Chairman and Managing Director K R Kamath said.

The RBI pegged 2014-15 GDP growth at a central estimate of 5.5 per cent. It said the FY14 current account deficit would be about 2 per cent of GDP.

To rein in inflation, Raghuram Rajan raised the repo rate three times since September by 0.25 per cent each for a total of 75 basis points.

In the previous policy review in January, the RBI increased the key rate by 0.25 per cent to 8 per cent.

Rajan said lead indicators do not point to any sustained revival in industry and services as yet and the outlook for the agricultural sector is contingent on the timely arrival and spread of the monsoon.

"Easing of domestic supply bottlenecks and progress on the implementation of stalled projects already cleared should brighten up the growth outlook, as would stronger anticipated export growth as the world economy picks up," he said.

Rajan said the primary objective is to improve the transmission of policy impulses across the interest spectrum and improve liquidity in the system.

"The term repo has evolved as a useful indicator of underlying liquidity conditions. It also allows market participants to hold liquidity for a longer period...evolving market-based benchmarks for pricing various financial products," he said.

The RBI will continue to monitor liquidity conditions and ensure adequate flow of credit to the productive sectors.

"Liquidity conditions have tightened in March, partly on account of year-end window dressing by banks, though an extraordinary infusion of liquidity by the Reserve Bank has mitigated the tightness," he said.

The Reserve Bank will propose measures to reduce such practices, he added.

The second bi-monthly monetary policy statement is scheduled to be announced on June 3.