Steady on course, no need for pressing the brake or accelerator

For borrowers, the news could have been better and the savers and lenders are not celebrating yet. The rate at which money is lent becomes t...

For borrowers, the news could have been better and the savers and lenders are not celebrating yet. The rate at which money is lent becomes the income of the lender and an expense to the borrower and this time around the Reserve Bank of India (RBI) has made no change in the key rates that influence all others in India. In his latest credit policy, RBI Governor Dr Yaga Venugopal Reddy has opted for status quo on many key areas, including interest rates. Reddy might have several compulsions for not going for a change in the bank rate or cash reserve ratio (the key signals for interest rate changes), but borrowers are still happy.

If you’ve taken a home loan or car loan, your interest payments will continue at the same level as before. The status quo on interest rates means borrowers need not recalculate their EMIs (equated monthly instalments) or interest rate payments. But many bankers like Corporation Bank Chairman Cherian Varghese feel that the downward movement in rates may be over and there could be an upward movement later.

It may be time to lock into fixed rates. Many countries, including the US, have already hinted at the possibility of a rise in interest rates. But Reddy has not made any commitments in this policy.

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Obviously, India Inc will be happy if the present low interest rate regime continues. Corporate profits had zoomed in the last two years due to a fall in interest burden. Shareholders had benefited from better corporate performance last year. The actions and comments of the RBI Governor will be keenly watched in the coming days. But as expected, the RBI did not make any major steps as the new government is yet to take over and policies are still not clear.

Both as a lender and a borrower you are in the same position as before. Deposit rates are unlikely to move up and home loan rates unlikely to move down. Locking in at the current rates is a good strategy

The price levels are expected to be a concern in the coming months. The main culprit could turn out to be crude oil prices which are already over the 13-year highs. The RBI alone cannot control price levels in the country. It will have to be supported by the Central and State governments. Any hike in petrol and diesel prices here will have a domino effect. The RBI has marginally increased the inflation estimate from 4.5 to 5 per cent to 5 per cent in this policy. Nothing to worry about. Not yet.

It is time to lock yourself in the highest fixed return instrument (like a National Saving Certificate or a Monthly Income Scheme-Recurring Deposit combo) as a lender. As a borrower it is time to lock in at the lowest fixed interest rate for the longest term you can get.

What is a Credit Policy

Monika Halan
A credit policy announcement is the Reserve Bank of India’s (RBI) way to influence the amount of money and credit in the Indian economy, which has an impact on the rates of interest and inflation and hence on economic growth and prices. RBI’s credit policy is also the Bank’s way of giving market signals on which market players will base their production decisions. The RBI’s role as the Central Banker makes it responsible to smoothen out the seasonal wrinkles between demand and supply of money in the economy as well as set the long term agenda for all money matters in the country. This means that RBI, by making money cheaper (lower interest rates) or more expensive (higher interest rates) influences money and credit conditions in the economy, targets good growth, employment and stable prices. RBI has four chief weapons to do its job of maintaining the desired equilibrium in the economy, these are:
1.Open Market Operations (OMO). When the RBI buys government securities, it adds to the stock of money in the economy. This is added to the reserve of the selling bank, who can now lend a multiple of this amount. The extra liquidity has the power to push down interest rates and give a boost to business activity, that can now be financed more cheaply.
2.Reserve Requirements. The RBI does not allow banks to lend all of the money they get as deposits. A fraction has to be kept as a ‘reserve’. The higher is the reserve ratio, the less the banks can lend forward, the tighter the money supply and higher are the interest rates. In India, the CRR currently is 4.5 per cent, down from 15 per cent in 1981. The RBI has kept this rate constant signalling no change in its view on the Indian economy.
3.Bank Rate or Discount rate. This is the rate at which the RBI makes very short term loans to banks. An increase in the discount rate means the RBI wants to slow the pace of growth to reduce inflation. A cut means that the RBI wants the economy to grow and can handle the accompanying inflation. Indian bank rate is at 6 per cent down from 10 per cent in 1981 and 12 per cent in 1991. This credit policy has kept the bank rate unchanged at 6 per cent signalling an economy on course.
4.Repo rate – the rate at which the RBI borrows short term money from the market. This is also an indicative rate that gives price signals on money. Repo rates are now at their lowest, since daily repo auctions began in 2000, at 4.5 per cent. Repo rates are unchanged again giving the ‘on-course’ signal to the economy.

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