RBI policy meet: 5 reasons why it may keep rates unchanged

The Reserve Bank of India (RBI) Governor Raghuram Rajan is expected to keep the interest rate unchanged at 6.75 per cent in its fifth bi-monthly monetary policy review on Tuesday. Two months ago, Governor surprised the market with a 50 basis points cut in the repo rate, the  rate at which it lends to banks. The cumulative interest cuts is about 125 basis points since January this year. So why Rajan is expected to maintain a status quo ?

1. Banks are yet to full transmit the rate cut to customers

The interest rate transmission, which  is gradual and slow, takes at least three quarters. So the banks are bound to take more time to fully transmit the interest rates cut to retail and corporate borrowers. In fact , the deposit rates have to come down drastically for banks to pass the low cost of funds benefit to customers.

2. Retail inflation is still on higher side

While the wholesale price index (WPI) is  on a negative zone , , the consumer price index (CPI) , also tracked by RBI for cutting rates , has started moving up. CPI has climbed up to 5 per cent as against the 6 per cent targeted by RBI by January 2016. In fact , RBI itself has projected the inflation rate at 5.8 per cent by January next year. Of late , there are  reports of prices of onions , pulses , vegetables etc going up.

3. US Fed Rate hike to impact outflow of dollars

The sword of US Federal Reserve bank hiking interest rates is still hanging over the Indian financial markets. While they have kept  away from hiking interest  rates  so far because of slow domestic recovery and also slowdown in the global economy especially sudden Chinese downturn , the US Fed rate is now expected to take a call on rates in mid December this year. If they hike the rates , the global funds would go back thereby putting pressure on the current account deficit. This would result in rupee depreciation  which has all the potential of imported inflation.

4. Possibility of widening fiscal deficit

There are also concerns on the fiscal deficit front. The burden of seventh pay commission , higher capital infusion to PSU banks etc would widen the fiscal deficit.

5. Higher postal savings rate over banks fixed deposits

The higher postal interest rates  are also very critical in deciding the future course of action for the RBI. If the postal rates remains at high level , the banks will be at disadvantageous position if RBI cuts the rate further as money will move away from bank deposits. The postal interest rates decision will be taken by government, which has political implications.