Raghuram Rajan Keeps Interest Rates Unchanged

 

In its sixth bi-monthly monetary policy review for 2015-16, held on February 2, Reserve Bank of India (RBI) Governor Raghuram Rajan has left the repo rate unchanged, at 6.75 per cent. (Repo or repurchase rate is the rate at which the RBI lends to leading commercial banks.) The RBI also left the cash reserve ratio (CRR is the amount of funds that the banks have to keep with the RBI) unchanged at four per cent.

The central bank said that it would wait till further data on inflation to cut interest rates. This is an indication home buyers will have to wait for the central bank to reduce rates further to see any decline in their equated monthly instalments (EMIs) .

In 2015, the central bank reduced the repo rate by 125 basis points. Following this, major commercial banks had cut the base rate many times. As home loan interest rates are related to the base rate, home buyers benefited, though many believe that banks did not pass on the benefits enough to home buyers.

When the RBI cut the repo rate for the first time from eight per cent to 7.75 per cent in January 2015, commercial banks took some time and urging to follow suit. Moreover, when commercial banks cut the base rate, they increased the spread, and this did not lead to a substantial fall in home loan interest rates.

On Growth

“Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of five per cent by the end of 2016-17," the central bank said in its statement.In December, inflation was 5.61 per cent. Even though this is not high, inflation in India had been rising since July 2015.

The RBI also said that the January target of six per cent for consumer price index-based (CPI) inflation should be met. India had seen unusually high rates of inflation in the first few years of this decade. Even though this has changed dramatically since Rajan became the RBI governor, inflation had been rising again. It is not clear when the RBI would slash the repo rate again, allowing home loan interest rates to fall again.