RBI needs to ensure lending rates remain in range next fiscal
As widely expected, the RBI kept the key benchmark interest rates unchanged on Friday. Apart from an obvious signal for a prolonged pause, some fear that the scope for further cuts has shrunk more than imagined earlier. With inflation expected to shoot up next fiscal owing to normalisation of food prices and adverse base effects, only a shock to the growth-inflation balance may prompt the Monetary Policy Committee to cut the repo rate from the current 5.25 percent. Given the favourable growth outlook supported by a series of trade pacts and easing inflation, the RBI firmly believes the current rate is just what is needed for the economy for now.
However, industry thinks otherwise. It reasons that high borrowing costs are choking enterprises, particularly smaller ones, and an immediate 0.25 percentage-point cut would ease the effective lending rate from 14-16 percent now to 13-15 percent. Without rate relief, capital expenditure and trade finance remain constrained, hurting growth and preventing businesses from tapping global export opportunities.
While the central bank refrained from giving fresh growth and inflation forecasts until April, by when the new data series will be published, projections for the first two quarters of the next fiscal are not quite uplifting. Though Governor Sanjay Malhotra insisted that India is in a sweet spot, the first two quarters’ growth estimates are at 6.9 percent and 7 percent, and the inflation forecasts were raised to 4 percent and 4.25 percent. If inflation breaches the RBI’s 4 percent target in 2026-27, real interest rates will be above neutral. As it is, with supply outstripping demand, bond yields are hardening, while call rates are trading below the overnight repo rate, unsettling the RBI, which prefers the policy rate to transmit uniformly. That said, Malhotra repeatedly emphasised that the government’s net borrowings next fiscal were barely ₹20,000 crore higher than in this one, which the central bank can comfortably manage.
As for liquidity, the RBI vowed to stay proactive and ensure ample levels at all times. Last year, the central bank had to step in to alleviate pressure on systemic liquidity, thanks to foreign capital outflows and a large government bond supply. Given the prevailing global financial market volatility, the central bank will have to support durable systemic liquidity to ease funding pressures, improve money market conditions, facilitate further monetary policy transmission and soften bond yields to ensure that lending rates remain range-bound.