RBI Policy Takeaways: Raghuram Rajan Didn't Cut Rates But Home Loan EMIs May Still Fall

The Reserve Bank of India (RBI) on Tuesday held its repo rate (the rate at which the central bank lends money to commercial banks) steady at 6.75 per cent, having cut the policy rate by as much as 125 basis points in past one year. In line with market expectations, the reserve bank held the rate at its bimonthly policy review on Tuesday, arguing that it would wait until the US Federal Reserve makes a move on raising interest rates there. RBI Governor Raghuram Rajan noted that weak rural and global demand was holding back economic growth, while highlighting pockets of weakness in sectors such as construction.

"The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to five per cent by March 2017," Rajan said in his statement.

Here are four things that came out of Tuesday's policy rate announcement:

RBI wants banks to reflect earlier cuts

The central bank said that since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps had been transmitted by banks. The median base lending rate has declined only by 60 bps.

Ease in EMIs as new formula for base rate soon

The RBI will soon finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to. The government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates. In addition, the on-going clean-up of bank balance sheets will help create room for fresh lending. The RBI will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to five per cent by March.

Subdued performance of construction sector

The RBI said that while there were areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand hold back stronger overall growth. Similarly, while prospects for a revival in service sector activity have been boosted by optimism on new business, pockets of lacklustre activity such as construction weigh on the overall outlook. The step-up in public capital spending and the easing stance of monetary policy may revive private investment demand, supported by easing input prices and improving conditions for doing business. The growth projection for 2015-16 has accordingly been kept unchanged at 7.4 per cent with a mild downside bias

7^th Pay Commission proposals

The implementation of the 7th pay panel recommendations and its impact on wages and rents will be a factor in the central bank's future deliberations, though its direct effect on aggregate demand was likely to be offset by appropriate budgetary tightening as the government stayed on the fiscal consolidation path, the bank said. The RBI would follow developments on commodity prices, especially food and oil, while tracking inflationary expectations and external developments.