RBI keeps interest rates steady: Home, auto and personal rates won’t fall till Union Budget

While the central bank retained the Repo rate — the RBI’s lending rate to banks — at 6.75 per cent after the 50 basis points reduction in its September review and also kept the cash reserve ratio (CRR) and statutory liquidity ratio unchanged — it is waiting for transmission of previous rate cuts by banks. Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks. The median base lending rate has declined only by 60 bps.

The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds which all banks will move to. Meanwhile, 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 5 per cent by March 2017.

What’s worrying the RBI? Retail inflation measured by the consumer price index (CPI) increased for the third successive month in October 2015, pushed up by a surge in the monthly momentum. Food inflation rose sharply in October, driven especially by pulses. “While oil prices, barring geopolitical shocks, are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance,” Rajan said.

The RBI also reiterated its projection that the economy will grow 7.4 per cent in the year ending March 2016. The outlook for agriculture is subdued, in view of both rabi and kharif prospects being hit by monsoon vagaries. While there are areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand holds back stronger overall growth.