RBI Monetary Policy: Your interest rate on home, car loans won't reduce anytime soon

The Reserve Bank of India's inflation projection shows that the window for further cut in repo rate will be open only towards the end of 2020. The retail inflation, or the consumer price index (CPI), which the RBI tracks to fix interest rates is expected to go below the targeted 4 per cent by the third quarter of 2020-21.

As per RBI's monetary policy document, the inflation trajectory has been set at 5.4 to 5.0 in the first half (April-Sept) of 2020-21 and then down to 3.2 per cent in the third quarter (Oct-Dec ) of  the current fiscal.

Clearly, the inflation projection suggests that easing of interest rate by the RBI is likely to take place towards the end of 2020, if the projection holds right.

Current inflation data is not very encouraging. CPI reached a level of 7.35 per cent in December 2019 as compared to 5.54 per cent in November 2019.  This flaring up of inflation also surprised the RBI which has often revised its inflation outlook in the past year. Unpredictable food prices are on the rise and there are expectations of core inflation moving up in education, healthcare, telecom tariff etc.  

The RBI has kept repo rate unchanged at 5.15 per cent in its bi-monthly monetary policy. But that doesn't mean that interest rate offered by banks won't go down. The banks are a bit slow in transmitting the 135 basis point cut by the RBI in its repo rate in the last one year. The banks so far have  transmitted only 69 basis points. Theoretically, there is still room for another 66 points cut in the lending rates.

But it remains to be seen if banks will extend the benefit of lower cost of funds to existing retail borrowers or try and protect margins because of higher provisioning pressure in overall asset quality.     

The RBI has pegged the GDP at 6.0 per for 2020-21,  which is lower than the 6.0-6.5 per cent projected in the Economic Survey 2019. According to the central bank, the first half (April-Sept) would see a GDP in the range of 5.5-6.0 per cent, while the economic activity is expected to pick up in the second half with GDP growth expected to improve to 6.2 per cent in the third quarter (Oct-Dec) of 2020-21.  

Interestingly, the Union  Budget 2020-21 presented by Finance Minister Nirmala Sitharaman has mentioned only the nominal GDP growth of 10 per cent. The Budget also talks about an average GDP of 7.4 per cent  between 2014 to 2019 with an average inflation of 4.5 per cent. If one extends the average inflation at 4.5 per cent in 2020-21, the GDP mathematics works out to be 5.5 per cent. This somewhat matches with RBI's  assessment of 5.5 to 6 per cent in the first half of 2020-21.

Clearly, all the projections by RBI, Economic Survey and the Union Budget hints that the worst is over and the GDP is bottoming out in 2019-20. The CSO's advance estimates have pegged the GDP at 5 per cent in 2019-20.

On fiscal deficit, the RBI had earlier taken a stand that it doesn't doubt the government's promise of maintaining the deficit at 3.3 per cent of GDP in 2019-20. It now says that the higher fiscal deficit of 3.8 per cent in 2019-20 has not resulted in an increase in market borrowings as compared to budgeted estimates.

The fiscal deficit targeted for 2020-21 is around 3.5 per cent.

Also read: After Sitharaman's Budget 2020, RBI takes more steps to revive economy

Also read: RBI pegs FY21 GDP growth at 6%, says private consumption, income tax cut to drive growth