RBI Keeps Interest Rates Unchanged, Signals Rate Cuts Are Unlikely This Year

Strategic Insights -

Reserve Bank of India (RBI) Governor Raghuram Rajan chose to keep interest rates unchanged on Tuesday, despite suggestions from commercial banks that they might lower rates. This decision comes as banks have been holding on to rates due to liquidity concerns and higher deposit costs. However, Rajan's tough message to banks, urging them to pass on previous rate cuts, seemed to have an instant impact, with State Bank of India, HDFC Bank, and ICICI Bank lowering rates within hours.

The RBI's decision to maintain the repo rate at 7.5% and the cash reserve ratio at 4% suggests that the central bank is not ready to reduce interest rates further, at least for the remainder of the year. Rajan emphasized that policy transmission will take time, but the situation is ripe for rate cuts by banks. He also mentioned that corporates are borrowing from markets, and the pressure on banks will soon lead to a reduction in interest rates.

The RBI is optimistic about growth, increasing the forecast for the current fiscal year to 7.8% from 7.5% earlier, with a caveat that a normal monsoon and the government's pro-growth policies need to materialize. However, insiders expect minimal rate cuts to facilitate growth. The RBI's forecast indicates that inflation will accelerate to 5.8% in the fourth quarter of the fiscal year and remain around 5% in the fourth quarter of 2017, above the targeted level.

Key Takeaways:

  • RBI Governor Raghuram Rajan kept interest rates unchanged, dampening hopes of sharp reductions during the year.
  • Commercial banks had kept lending rates unchanged despite two previous rate cuts by the RBI.
  • State Bank of India, HDFC Bank, and ICICI Bank lowered rates within hours of the policy announcement.
  • Rajan emphatically stated that policy transmission will take time, but the situation is ripe for rate cuts by banks.
  • The RBI is optimistic about growth, increasing the forecast for the current fiscal year to 7.8%.
  • Inflation is expected to accelerate to 5.8% in the fourth quarter of the fiscal year.
  • The RBI's forecast indicates that inflation will remain around 5% in the fourth quarter of 2017.
  • The RBI is watching progress on clearing obstacles for reviving stalled projects and changes in the US Federal Reserve's stance.

Statistics:

  • RBI's forecast for growth in the current fiscal year increased to 7.8% from 7.5% earlier.
  • Inflation is forecasted to accelerate to 5.8% in the fourth quarter of the fiscal year.
  • The repo rate was maintained at 7.5%.
  • The cash reserve ratio was kept unchanged at 4%.
  • The statutory liquidity ratio remained unchanged at 22.5%.
  • The Bombay Stock Exchange's Sensex closed 0.04% higher at 28,516.59 points.
  • Yields on benchmark government bonds climbed seven basis points to 7.79%.

Sources:

  • RBI's Monetary Policy Statement
  • RBI Governor Raghuram Rajan's comments during the press conference
  • Standard Chartered Bank's Ananth Narayan's comments to Reuters
  • Nomura Securities' Sonal Varma's comments to Reuters