Will RBI Lower Interest Rates Anytime Soon?

It was in August 2017, when the Reserve Bank of India (RBI) last slashed key lending benchmark rates. By implementing a 25-basis-points (bps) reduction in repo rate — the rate at which the Central banks lend money to scheduled financial institutions — the RBI brought the effective rate down to six per cent. Since rates were already at a record low, the Reserve bank decided not to make any changes in its bi-monthly monetary policy reviews in October and December.

Despite the fact that the real estate sector would greatly benefit from a rate cut at a time when new project launches are down and home sales are few and far between, those expecting any reduction in rates in the February policy review are likely to be disappointed.

When the Governor Urjit Patel-led six-member monetary policy committee (MPC) makes the sixth bi-monthly monetary policy statement on February 7, it is likely to go for keeping things as they are.

On January 29, Chief Economic Adviser (CEC) Arvind Subramanian said that the scope for the RBI to lower interest rate might be limited with growth picking up and inflation hardening.

"By definition, if growth is picking up and inflation is rising, there is less scope of monetary easing. By definition that's true," Subramanian told media while adding that it would be inappropriate for him to comment on rate cut as it was the RBI’s domain.

Crossing the central bank’s comfort level, retail inflation rose to 5.21 per cent in December. The RBI is comfortable at an inflation rate of four per cent, plus or minus two per cent. Any disruption in the comfort zone would mean the central bank holding interest rates at it is, if not increasing it.

"For about 18 months, we could have had lower interest rate. Now, I think they are probably more consistent with inflation outlook … Now, the cycle has turned… The inflationary pressure is mounting,” the CEA said.

Experts are also of the view that rising oil prices and firming inflation are likely to restrain the central bank from slashing benchmark lending rate on Wednesday for the third time in a row.

In the times to come

If we go by the forecast of global brokerage Bank of America Merill Lynch, the MPC might announce lowering of rates by 25 basis points in its next policy review in April.

On January 24, the global brokerage said that inflation risks were overdone, and the RBI would cut rates in April.

Even if retail inflation upped to 5.2 per cent in December, it was within the RBI’s comfort zone of two-six per cent, the bank said. It also said it expected the headline inflation to cool down to five per cent in January, and there were fundamental reasons for it to believe so.

"We expect the RBI monetary policy committee (MPC) to look through the jump in inflation to 5.4 per cent in April-June, that is spooking some in the markets, as it emanates from the base effects of low 2.2 per cent April-June 2017 inflation … We still expect the RBI MPC to cut policy rates by a final 0.25 per cent in April," the brokerage said.

Click here to know how to make the most of it when banks reduce rates.