The Reserve Bank of India (RBI) kept a key interest rate unchanged at a five-year low of 6.50% on Tuesday in its bi-monthly policy review.
This may not trigger an immediate reduction in EMIs for loan borrowers, but banks may nevertheless look at a lending rate cut in the coming months. In the first policy review of the financial year, governor Raghuram Rajan had in April cut the central bank's repo, or short-term, rate by 25 basis points to 6.5%. Repo rate is the rate of interest at which banks borrow from the central bank.
The cash reserve ratio (CRR), or the share of deposits banks must keep with the RBI, was unchanged at 4% after Tuesday’s announcement. Helped by an oil price slump, Rajan has cut the repo rate by 150 bps since January 2015, but there are now reasons to pause.
Growth of 7.9% in the March quarter cemented India’s ranking as the world’s fastest growing large economy, though the country needs even faster growth to create jobs for millions of youngsters joining the workforce. Typically, economic growth limits the justification for an interest rate cut. The RBI's priority is meeting inflation targets of 5% by March 2017 and 4% over the medium term, though private investment is subdued.
Annual consumer price inflation accelerated to 5.39% in April, crude prices are well off January’s more than 12-year lows, a US rate hike is anticipated, and any shortfall in rain could ignite food prices. For now, economists say, Rajan will focus on persuading banks to pass on benefits of earlier RBI rate cuts to borrowers, as they have only lowered lending rates by 65 bps since early 2015