EMIs to remain high, as RBI keeps lending rates intact

High interest rates on automobile and house loans will continue as the Reserve Bank of India (RBI) Tuesday decided to keep key interest rates unchanged in its fifth bi-monthly policy review of the current fiscal.

RBI Governor Raghuram Rajan said a change in the monetary policy at the current juncture will be premature and he will wait for the decrease in inflation to continue.

EMIs to remain high, as RBI keeps lending rates intact
RBI Governor Raghuram Rajan 

However, he also mentioned the possibility of a rate cut early next year if the current downturn in inflation momentum continues.

He even predicted an interest rate reduction "outside the policy review cycle" if the data so permits.

"The policy is led by the data we are receiving and we need to be relatively sure that there is a moderation in inflation. We have had a couple of months (of low inflation) after 4-5 years of high inflation, we have to make sure that this is for real, especially because we do not want to flip flop," Rajan said.

RBI had kept a target for bringing down inflation by six percent in 2015. Current data has shown that the country's annual retail inflation eased to a record low of 5.52 percent in October. The wholesale inflation has also dipped. It was down to 1.77 percent from 2.38 percent.

At the same time, factory output, measured by the Index of Industrial Production (IIP), grew by just 2.5 percent during September pointing towards the persistent weakness in spurring manufacturing activity.

The central bank's action is along expected lines as most analysts had predicted a status quo, considering the macro-economic situation and current data.

"Industry was hoping that, given the combination of persistent weak demand and sustained moderation in inflation, the Reserve Bank could have found merit in an accommodative stance on interest rate reduction," said Sidharth Birla, president, Federation of Indian Chambers of Commerce and Industry (FICCI) .

The Confederation of Indian Industry (CII) predicted a more accomodative monetary policy early next year.

"RBI has leaned in favour of anchoring inflationary expectations in its pursuit of finding a solution to the growth-inflation conundrum which is as per market expectations," commented Ajay S. Shriram, president, CII.

Though the RBI took a dovish stand by hinting at a rate cut early next year, the Associated Chambers of Commerce and Industry of India (Assocham) lamented the missed opportunity for RBI at this fifth policy review in the current fiscal.

"RBI has obviously overlooked strong demand from the industry for a cut in the interest rates. The industry's demand for lower interest rates was fully justified," Assocham president Rana Kapoor said.

"For one, the concerns over the inflation have largely been addressed with crude oil prices ruling at five-year low. We cannot ask for more. Secondly, growth remains muted. Certainly if we need to really go in for the 'Make in India’ initiative in the right earnest, the growth must be given priority," he added.

The government said it looks forward to the RBI supporting the revival of growth and employment.

"The Government and RBI will work towards a monetary policy framework that will help institutionalize the gains achieved on the inflation front so as to reduce inflationary expectations and further support the revival of investment and growth," a finance ministry statement said.

The markets though were highly disappointed. The benchmark index of Indian equities markets plunged 116 points or 0.40 percent.

The move by the RBI resulted in heavy selling in auto, information technology (IT) and oil and gas sectors, while healthy buying was observed in healthcare, metal and capital goods.

The 30-scrip Sensitive Index (Sensex) of the S&P Bombay Stock Exchange (BSE), which opened at 28,522.46 points, closed at 28,444.01 points, down 115.61 points or 0.40 percent from the previous day's close at 28,559.62 points.

The wider 50-scrip Nifty of the National Stock Exchange (NSE) also closed trade in red. It was down 31.20 points or 0.36 percent at 8,524.70 points.

The takeaways of the latest policy review:

-- RBI maintains key interest rates in Repo, reverse repo and CRR.

-- No change in SLR or reserve ratio of commercial banks.

-- No addition of liquidity in the market.

-- Economy to remain sluggish as weak demand may be hamper by high lending rates.

-- RBI strongly hints at a possible rate cut in early next year.

-- Industry unhappy but reconciles with RBI's dovish stand.

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