NEW DELHI: On Tuesday, the focus will be on the repo rate cut that Reserve Bank of India (RBI) Governor Raghuram Rajan is expected to announce, which would reflect RBI’s position on growth and inflation.
Repo rate is the rate at which the RBI lends to banks.
These are critical and will impact the decision on bank rates. “A major impediment has been the transmission of these rate cuts to the real economy,” says Richa Gupta, Senior Director, Deloitte.
A lower repo rate reduces banks’ borrowing costs, prodding them to cut interest rates for final home, auto and corporate borrowers. Till October, the RBI had raised the repo rate 13 times to tame prices.
A higher repo would raise banks’ borrowing costs, which in turn would raise interest rate on final home, auto and corporate loans.
“Over the past one and half years the RBI has cut the repo rate by a cumulative 125 basis points and as things stand we may get another cut of 25 basis points in the next policy meeting,” feels Gupta.
But will the banks pass on the benefits of lower rate to the retail customers?
It is a concern, since traditionally banks have used such cuts to resolve their structural problems. Anis Chakravarty, Lead Economist and Partner at Deloitte feels that the annual policy review would be conducted in an environment where the government has heeded the macro- economic stability prescription and stuck to its Fiscal Responsibility and Budget Management (FRBM) targets.
There is an uncertainty around on the extent of the rate cut that Rajan is expected announce.
With inflation under check and government sticking to its fiscal consolidation path, market expectations are that RBI may cut interest rate by up to 0.50 per cent to propel growth.
Will it be 25, 50 or 75 basis points?
Experts feel, for medium term policy guidance, more important than rate cut would be the commentary and the guidance given out by the RBI. “The Reserve Bank may leave room for further rate tempering during the course of the year to more external trends like the occurrence of a normal monsoon (impacting inflation) as well as the speed of monetary transmission,” feels Chakravarty.