Wednesday 26th September 2018

    No respite for borrowers as RBI holds rate; India Inc disappointed

    Hopes for a significant reduction in interest rates were dashed with the Reserve Bank of India (RBI) deciding to keep interest rates unchanged during its fourth bimonthly monetary policy review. The repo rate has been retained at 6%. Read On ..

    The move virtually rules out any lending rate cuts by banks, which could have lowered equated monthly instalments on home and auto loans.

    While RBI had reduced the repo rate in the last policy meeting held in August, most banks have not responded with corresponding interest rate cuts. Lending rates of banks in India are mostly between 8-9% now.

    The central bank kept the interest rate unchanged as inflation has gone up and they expect it to go up further.

    Industry players feel that the RBI has been very cautious in its stance on the interest rate.

    "Though the inflationary pressures had subsided in the near term, from a medium term objective, the inflationary risks are still on the upside, so keeping the rates unchanged is a more cautious decision by the RBI. The policy also enables to settle down with the after effects of demonetisation and GST which are very important parameters to keep a tap on, said George Alexander Muthoot, MD - Muthoot Finance Limited.

    RBI said retail inflation measured by year-on-year change in the consumer price index (CPI) edged up sequentially in July and August to reach a five month high, due entirely to a sharp pick up in momentum as the favourable base effect tapered off in July and disappeared in August.

    "Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil. The possibility of fiscal slippages may add to this momentum in the future," RBI said.

    It said inflation is expected to rise from its current level and range between 4.2-4.6% in the second half of this year. The monetary policy committee which decides the interest rate has observed that headline inflation rose by two percentage points since the August policy review.

    "Managing inflation is the core theme of the Monetary Policy Committee and the latest retail inflation reading of 3.4% with a potential upside risk, did not support a repo rate cut at this juncture. Hence, this measure was along expected lines. Further, RBI has revised the inflation forecast for the second half to 4.2 -4.6 per cent as compared to 3.5-4.5 per cent in the 3rd bi-monthly policy. This sums up the concern of RBI on the inflation front, said Indian Banks’ Association chairman Rajeev Rishi.

    India corporate sector did not hide its disappointment as it was expecting rate cuts to boost economic growth.

    "Considering the current economic situation, it is disappointing that the RBI has chosen to maintain status quo on policy rates. The downside risks to growth have increased significantly over the last few quarters which coupled with sluggish credit off-take has dampened activity across all the sectors, said Surendra Hiranandani, Chairman & MD, House of Hiranandani.

    According to V S Parthasarathy, Group CFO, Group CIO, Mahindra & Mahindra, the monetary policy committee has clearly reiterated its wait and watch approach.

    "Good policy is a process and not a state of being," he said.

    Parthasarathy said for India, a higher trajectory of growth is a must and described the RBI action of maintaining status quo as a missed opportunity.

    "We need smart and positive cues and from that perspective, this is an opportunity missed. We welcome the ‘pause’ but the positive cue should come sooner rather than later." he said

    "India has a historic chance to take its growth trajectory higher. The single biggest goal for India is to attain a higher growth rate and on that path, positive cues are very important," Parthasarathy added.

    RBI has also lowered the growth projection as it trimmed real GVA (gross value added) growth for 2017-18 to 6.7 per cent from the August 2017 projection of 7.3 per cent.

    RBI said the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. It said goods and service tax implementation seems to have an adverse impact as it made prospects of the manufacturing sector uncertain which may further delay investment revival.

    Naresh Takkar, MD and Group CEO, of rating agency ICRA said the recent slowdown in volume growth is likely to prove transitory rather than structural in nature.

    "While domestic consumption is likely to remain the chief driver of economic growth in FY2018, a sustainable upturn in investment activity remains elusive, given the challenges faced by the corporate sector and the SMEs, as well as the Central and the States"

    - TradeBriefs Bureau

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