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Why the RBI left interest rates steady?


 Why the RBI left interest rates steady?
The bad news for borrowers is that interest rates are unlikely to go down in a hurry, following the RBI decision today to leave interest rates steady. The good news for retired folks who survive on fixed income yielding securities is that interest rates are not going down very soon. So they can continue to hold onto existing interest bearing securities.

The RBI today kept the repo rate (the rate at which RBI lends to banks) steady. The repo rate largely determines interest rates in the economy. If the RBI cuts repo rates, banks too can cut interest rates from borrowers and reduce fixed deposit interest rates.


Cutting the repo or interest rates, largely depends on inflation and inflation in the country is still at elevated levels.

If inflation remains high, the RBI cannot think of cutting rates, as a cut in rates would lead to greater consumption and a further spike in inflation.

What also happens is that with low interest rates and high inflation, the real rate of investment drops and could also get into the negative. For example, if inflation is at 8% and bank deposit rates which an individual gets is 7%, the real rate of returns is negative.

Here's what the RBI had to say in a statement. "On the inflation front, despite recent moderation, global commodity prices remain high. While oil prices appear to have stabilised, balancing between weak demand prospects and abundant liquidity, upside risks from persistently high liquidity and geopolitical developments remain. Further, domestic prices of administered petroleum products do not reflect the full pass-through of global commodity prices, and under-recoveries persist."
The RBI also increased its inflation forecast to 7.5% to March 2013.

The central bank has now hinted at dropping rates only in the first quarter of the next year. Clearly, the high levels of inflation prompted the RBI to leave rates unchanged. Borrowers looking to borrow at lower interest rates may have to wait for a while.

Read more about: repo rate
Story first published: Tuesday, October 30, 2012, 11:58 [IST]
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