RBI monetary policy review: Loan rates might get cheaper as Raghuram Rajan led Reserve Bank of India cut interest rates by 25 basis points for the third time this year because of falling inflation and slow economic growth. The bank, however, warned that below normal monsoons, which has been forecast by the IMD, rising crude oil prices and a volatile external environment remains as risks to inflation in the days ahead.
The benchmark repo (repurchase rate) now stands at 7.25 per cent from 7.50 per cent earlier. This was widely expected since consumer price inflation had fallen to 4.87 per cent in April.
The RBI’s target inflation rate is 6 per cent by January 2016 and the central bank wants to reduce inflation to 4 per cent over the coming couple of years. At the same time, however, economic growth is not picking up fast. While GDP growth for the March quarter came in at 7.5 per cent, the growth for the whole financial year was 7.3 per cent falling short of the Central Statistics Office’s advance estimates. Moreover, core sector output shrunk by 0.4 per cent in April while the Index of Industrial Production (IIP) rose only 2.1 per cent in March, the slowest in five months.
However, the central bank has also to weigh the need to boost growth against potential inflationary forces which are building up.
“A conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak,” said the central bank it a statement
“With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty. Meanwhile banks should pass through the sequence of rate cuts into lending rates.”
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