RBI Leaves Repo Rates Unchanged At 6.25%
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RBI Leaves Repo Rates Unchanged At 6.25%

RBI Leaves Repo Rates Unchanged At 6.25%
(WackVerse)

Continuing its cautious mode, the Reserve Bank of India (RBI) left its repo rates unchanged — at 6.25 per cent — in its Sixth Bi-monthly Monetary Policy for 2016-17 on February 8. This may come as a disappointment to analysts who were expecting a repo rate cut in the range of 25-50 basis points.

In a poll conducted by Reuters last week, 28 of 46 participants expected the RBI to slash the repo rate by a quarter point, and two expected a 50-basis point cut. The remaining 16 have predicted the Central bank would cut rates in its policy review in April. For beginners, repo rate is the rate at which the Central banks lend money to commercial banks.

"The decision of the MPC (monetary policy committee) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) (based) inflation at five per cent by Q4 of 2016-17 and the medium-term target of four per cent within a band of +/- two per cent, while supporting growth," the RBI statement said.

The RBI policy stance, which has turned hawkish, from the earlier accommodative to the neutral now, is driven largely by external factors.

As the Central bank’s six-member monetary policy review committee watches out for US macroeconomic policies that might have "potential global spillovers" while targeting to bring headline inflation closer to four per cent on a "durable basis" in a "calibrated manner", home buyers who expected that home loans will even cheaper might have to wait for a while.

"International financial markets turned volatile from mid-January on concerns regarding the ‘Brexit’ roadmap and materialisation of expectations about economic policies of the new US administration," the statement said.

Commenting on the move, Unishire Managing Director Pratik K Mehta said, "The move is rather disappointing, especially for the real estate industry that has been grappling with demonetisation effect on sales and pressure on prices. Recently, banks have started reducing interest rates, but still, they are nowhere close to what would be sufficient for propelling growth.  An interest rate below eight per cent is what the sector requires."

Why home buyers need not sweat

Even if the RBI had decided to go ahead with a reduction, the move may not have attained the desired results. As a result of demonetisation, banks are flush with funds and have done their bit to pass it on to the lenders.

Most banks had already slashed their marginal cost-based lending rates (MCLR) up to 80 basis points after demonetisation and a further reduction was anyway unlikely, media reports said citing senior bank officials.

According to a report by CARE Ratings, the marginal cost-based lending rate has been significantly lowered to 7.98 per cent in January 2017 from 9.05 per cent in April 2016.

Now, heavy credit cost and low loan growth may not permit banks to implement further reductions. Data show that from an annual rate of 11 per cent in January 2016 to five per cent in January 2017, bank loan growth has seen a steep fall. 

The next policy review meet will be held on April 5.

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@@Thu Sep 14 2017 19:23:23