NEW DELHI: In an unexpected decision that surprised many, the Reserve Bank of India kept its key lending rate unchanged at 6.25 per cent on Wednesday. The decision disappointed many industry watchers and demolished hopes of lower borrowing cost necessary to revive spending and investment that took a beating after demonetisation of Rs 500 and Rs 1,000 notes.
Though it did not say it in as many words, the central bank indicated several things by leaving the key rates unchanged. One, the need for a rate cut is not yet clear. Two, there is also no clarity on how much money would come in or go out of the system as people continue to deposit old and withdraw new currency notes. Three, the central bank is bracing for a spike in inflation by March 2017. Finally, the RBI feels it has done enough and hopes that bankers would have a relook at their assets and pass on the benefits to consumers in the form of lower interest rates on loans.
While the central bank has cut the repo rate six times since January 2015, there are a few external concerns this time. The US central bank may hike its key rates soon, which could have an impact on emerging markets, including India. Also recently, the OPEC nations decided to cut the production of crude oil, which again could cause petrol prices to rise, thereby impacting inflation.
A few leading bankers told Express that the banks, despite the central bank’s decision to retain the repo rate, could cut the interest rates on specific loans given to consumers. “Expect lower interest rate announcements in the New Year, maybe even earlier. The system cannot be allowed to heat up,” said a senior official at Corporation Bank.
“With regard to liquidity and interest rates, the withdrawal of the incremental CRR requirement and the use of other instruments such as the MSS to manage liquidity is welcome,” Chanda Kochhar, CEO, ICICI Bank said. “This will help the banks to drop lending rates, thereby giving the economy, a much-needed breather.”