The repo rate, at which the Reserve Bank of India lends to banks, has been retained at 6.75 percent.
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The RBI also kept its overall growth projection for 2015-16 at 7.4 percent and said the inflation target of 6 percent in January next year as set out in the previous policy update also was within reach, albeit with a slight downside risk.
India’s central bank held its key interest rates steady on Tuesday, as inflation and growth remain in the projected path, although it signaled its willingness to ease further, keeping in view an imminent interest rate hike in the U.S.
“The strong growth data is driving the positive rupee sentiment”, said Navin Raghuvanshi, a Mumbai-based foreign-exchange trader at DCB Bank Ltd. “Investors will now wait for the central bank policy before any big moves”.
“Fast changing geopolitical situation in the Middle East and the increased terror threat with consequent economic costs will surely weigh on the RBI’s policy stance which is not expected to give any more cut in the interest rates in the ensuing review”, it pointed out. The 10-year government bond yield rose 2 basis points to 7.77 percent from levels before the RBI decision, while the broader NSE index .nsei rose 0.4 percent. “Today, despite the RBI slashing policy rates, banks are not able to fully pass on the benefit to borrowers as their cost of funds has not declined significantly”, says Rupa Rege Nitsure, group chief economist at L&T Financial Services. “Let us see what the government comes out with”, Rajan told reporters after the fifth bi-monthly monetary policy review. That is comfortably below the RBI’s target of 6 percent for January. Apart from that, the proposed pay hike of the central government employees will have an impact on inflation and fiscal deficit although the government can neutralise its direct effect on aggregate demand by budgetary tightening if it does not deviate from its commitment to fiscal consolidation.
After remaining low for many months, the headline consumer price inflation moved up to 5 per cent in October due to surge in food prices and is expected to rise further as the base effect wears-off.
The RBI will watch how commodity prices, particularly food and oil, play out in the coming months. Rajan once again flagged the issue of transmission of policy rate cuts into lending rate cuts by banks. At its last meeting in September, the central bank had surprised markets with a reduction of 50 basis points in repo rate.
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Additionally, Rajan said the government is also mulling to link the small savings rate – a factor deterring rate cuts by banks – to market rates.
