The Reserve Bank of India as was widely expected, kept interest rates on hold, defying calls from industry for a cut in interest rates. The current policy repo rate of the RBI stands at 6 per cent, which today remained unchanged.
The repo rates are rates at which the RBI lends money to banks and a drop in this rate, signals a drop in overall interest rates in the economy.
Loans unlikely to get cheaper
What this also means now is that interest rates on loans are not likely to reduce at least in the near future.
Of course, it is not as if banks have to take guidance from the RBI policy rates, they may even reduce rates, based on their own assessment. While the likely outcome of the Monetary Policy Committee meeting was largely known, industry and the government would have liked to see the RBI cutting interest rates. However, here are some of the possible reasons why the RBI did not cut interest rates today and left the Repo rate unchanged at 6 per cent.
Both retail and wholesale inflation has risen sharply in the last few days. But, what is alarming is the pace at which core inflation has risen.
In fact, core inflation is something that is most keenly watched by policy makers. Core inflation has jumped by as much as 70 basis points in the last three months to 4.5 per cent.
This is certainly not good news given that both fuel inflation and food inflation has edged higher. The MPC may have been worried over the trend, which is why they kept policy rates on hold.
The falling rupee too may have impacted the decision of policymakers. This is because a drop in the rupee makes things costlier, especially fuel.
This feeds into inflation, which in turn results in a status quo policy. The US Fed has also hinted at an interest rate hike in the month of December, which in turn would result in a stronger dollar against a basket of currencies.
In Europe too the ECB may hike interest rates early next year. At such time, the RBI dropping interest rates would be in contrast. Check rupee rates here
Spike in crude prices
A sharp hike in crude prices is never good news for policy makers. Crude prices have rallied about 20 per cent in the last few months.
Rising crude prices has forced petrol prices to be hiked by the Oil Marketing Companies. In cities like Mumbai petrol prices have hit Rs 80.
The government was forced to cut the excise duty on petrol by Rs 2 to tame fuel prices. Rising fuel prices have an impact on inflation, which is why the MPC may have decided to wait until December to see if things stabilize.