Inflation will continue to dictate EMIs as no repo rate change likely

Jun 02 2014, 11:44 IST
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Since July 2013, the policy repo rate was hiked by 75 bps in three steps. (Thinkstock) Since July 2013, the policy repo rate was hiked by 75 bps in three steps. (Thinkstock)
SummaryRBI's monetary policy will be scrutinised by Narendra Modi govt much more closely than borrowers.

When Reserve Bank of India Governor Raghuram Rajan unveils the next bi-monthly monetary policy on Tuesday, the central banks intentions and signals will be scrutinised by the new government at the Centre much more closely than the borrowers who have been waiting for a low interest regime for the last several years.

While analysts and bankers expect the central bank to hold the rates at the current level, whats being keenly awaited is whether the RBI will tone down its hawkish stance. In his April policy review, Rajan kept the rates steady and indicated that if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture. Rajan then said it was appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013 through January 2014 to work their way through the economy.

The RBI last hiked the repo rate by 25 bps to 8 per cent on January 28, 2014, on account of upside risks to inflation, to anchor inflation expectation and to contain second round effects. The move was intended to set the economy on the disinflationary path as recommended by the Urjit Patel Committee. Since July 2013, the policy repo rate was hiked by 75 bps in three steps.

Vijayan S, MD, DBS Bank, said, We expect the RBI will keep the benchmark repo rate unchanged at 8 per cent at the next monetary policy review. Even though the retail inflation has eased from 9.5 per cent in FY14 to 8.6 per cent at this point of time, the RBI will keep a close eye on inflation figures before considering any changes in the rates. Rajan and the new government have clearly mentioned that keeping inflation in check is going to be the stance taken by the central bank, Vijayan said.

According to Punjab National Bank chairman and MD KR Kamath, between the task of bringing down inflation and reducing the interest rates, the former has to be addressed first and that is very clear from the recent statements of the new government and the RBI. In this context, I expect the RBI to maintain status quo on interest rates in the ensuing credit policy, Kamath said.

The RBI may wait for the new government to announce the Budget before taking its view on interest rates. The RBI may consider the governments reforms on

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