As a result, 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.
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There had been pressure for the RBI to cut the repo rate in the wake of a continuing slump in India’s manufacturing sector, which grew at its weakest pace in over two years in November as demand and output continued to soften.
Cash Reserve Ratio- As per the regulations of the RBI or a central bank in other countries the banks are required to maintain a minimum amount in cash as reserves with the central bank. With the Fed all set to hike rates in its December policy after a nine-year hiatus, the RBI will also be wary of safe-haven demand and the impact on the rupee. Earlier in the day after keeping the key rates unaltered, Governor Rajan made his displeasure known for banks not doing enough on transmission, saying they have passed less than half of the cumulative 1.25 per cent repo rate cut by RBI in 2015. Those interviewed also agreed that Rajan would refrain from changing policy until inflation was in check and an expected increase in US interest rates occurred without causing too much emerging-market turmoil. The median base lending rate has declined only by 60 basis points, it added. “We need sustainable growth and we will ensure maximum sustainable growth we can get”, he said.
Leading ratings agency Crisil said the RBI would keep its policy rates unchanged for the rate of the fiscal, unless inflation surprises on the downside. “That is why we took a relook at the base rate and are coming to marginal cost pricing which we will be announced later this week”. RBI’s governor Raghuram Rajan has also indicated that there is a scope for banks to lower lending rates further.
Meanwhile, the Federal Reserve is widely expected to raise United States rates in December for the first time in almost a decade.
“The guidelines on the base rate calculation based on marginal cost of funds will be watched and appropriate actions will be taken on the same”, she said in a statement.
Inflation based on the consumer price index rose to five per cent in October, from 4.41 percent in September, mainly on the back of rising food prices. RBI is also hopeful that once the banks are able to clean up their balance sheets of the pile of bad loans, credit offtake will pick up.
On the way forward, Rajan said the RBI will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments.
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“The government will likely have to target, say, 3.9 per cent of GDP (as) fiscal deficit – higher than 3.5 per cent a year ago – to fund the 0.7 per cent of GDP outgo due to the 7th Pay Commission”.
