RBI may cut rates on Tuesday; EMIs set to come down

business

Updated: Feb 02, 2015 08:53 IST

If you are planning to buy a house or a car, or have been paying EMIs for your home loan, you would probably be keeping an eye on expected announcements from the Reserve Bank of India (RBI) on Tuesday.

RBI is expected to cut lending rates in its monetary policy review meeting as India’s key currency administrators and macroeconomic managers seek to jump-start Asia’s third-largest economy.

In a surprise move, the central bank reduced the repo rate, or key lending rate, by 0.25 percentage points on January 15, and industry groups have been rachetting up their demand for a repeat action.

The repo rate, the rate at which RBI lends to banks, now stands at 7.75%. A lower repo brings down banks’ borrowing costs, which in turn, prompts them to slash interest rates for final home, auto and corporate borrowers.

“We believe this is a beginning of a big rate cut cycle. We expect a further 1.25 percentage point cut over the next 12 months. We expect a further rate cut of 0.25 percentage point in the next monetary policy review on February 3,” investment banking major Morgan Stanley said in a report.

Data released last month showed that retail inflation grew 5% in December from the previous month’s 4.4% reversing a five-month downward trend, but still 1 percentage point lower than RBI’s threshold level of 6%.

India’s wholesale inflation rate crept up to 0.11% in December from 0% in November, but business leaders said the marginal rise should not deter the central bank to lower borrowing rates to aid an economic revival.

Analysts and economists will also be eyeing forward-looking cues in the accompanying policy statement -- RBI’s prognosis about the broader economy’s health, and it’s views about external and internal risk factors.

Some analysts, however, do not expect RBI to announce an interest rate cut on Tuesday.

“Since there has been no new development in the economy between the earlier rate cut announced and the policy date, there is no expectation of a rate cut this time. However, if there is a further 0.25 percentage point reduction, it has to be interpreted as the RBI deciding to be aggressive by cutting rates by 0.50 percentage points in this quarter,” credit rating CARE Ratings said.