MUMBAI: Reserve Bank of India governor Raghuram Rajan on 29th October stepped up the inflation control drive by raising a key policy rate but the increase is unlikely to impact interest rates for home, car and consumer loans.
The 25 basis points (100 basis points equal one percentage point) increase in repo rate (to 7.75%), which is the rate at which banks borrow from the RBI, has offset gains that banks would have made by two other measures that Rajan announced.
Amid the mixed signals from the central bank, bankers are unwilling to commit which way EMIs are headed but they dropped enough hints to suggest that they would prefer to maintain a status quo.
This is Rajan’s second repo rate hike in less than 2 months, who has spent a little over 50 days in Mumbai. “The cost of funds over the last three months has gone up. We are going back to a normalized monetary policy and over a period of time, it would come down,” said HDFC Bank managing director and CEO Aditya Puri. “We don’t see much impact on interest rates,” added Uco Bank chief Arun Kaul.
For the moment, however, there is good news despite the RBI raising repo rate. Simultaneously, it also reduced the marginal standing facility (MSF) rate by the same margin and enhanced the limit for banks to tap the 7-day and 14-day term repo window. MSF is the window that banks use to borrow from the central bank in case of extreme funds crunch. Under the repo facility banks can borrow for one-three days while under the term repo facility the duration could be seven days and also 14 days. MSF and the term repo were announced as part of a series of steps to deal with the continuous slide in the rupee seen in July and August.
Through the two steps announced on 29th October, Rajan sought to signal an unwinding but did not comment on the special dollar purchase window for oil marketing companies and other measures that are in place till the end of November.
In any case, with the government insisting that banks offer cheaper retail loans to boost demand, public sector banks that account for 70% of the business would find it tough to raise rates. Nevertheless, the calculators are out with the State Bank of India, the largest player in the business, set to take a call over the next few days. For Rajan, inflation is the biggest concern despite faltering growth. “We can’t live with close to double-digit CPI (consumer price inflation) for an extended period of time. My intention is to bring CPI within the boundaries of control,” he said.
Despite signs of improved farm output this year and revival in exports, RBI lowered the economic growth forecast to 5%, compared to the earlier projection of 5-5.5%. At the same time it noted that inflation will remain “higher than current levels” during the remaining part of the year. Wholesale price inflation was estimated at close to 6.5% in September, while retail inflation accelerated to 9.8%, prompting the repo rate hike. In fact, analysts are already betting on further increase in interest rates.
“With household inflation expectations still far into double-digit territory and CPI likely to be much more stubborn than its WPI sibling in the face of a still widening output gap, further rate hikes by the hawkish Rajan-led RBI cannot be ruled out,” BNP Paribas’s Richard Iley said in a note.