RBI governor Raghuram Rajan keeps key rates unchanged; EMIs won’t go down for now

Reserve Bank of India (RBI) governor Raghuram Rajan dashed expectations of the government, consumers and business leaders as he kept lending rates unchanged on Tuesday despite plunging inflation and mounting pressure to ease borrowing costs to aid a reviv

Unchanged interest rates would imply your home loan EMIs, which eat away large chunks of household incomes, are unlikely to fall anytime soon.

High loan rates could influence people’s decision to buy houses, cars and other consumer goods, mostly bought through loans.

The benchmark lending rate has remained unchanged since January last year, demonstrating the RBI governor’s unwavering commitment to keep inflation firmly bottled up for longer period of time,  before softening of the rather hawkish stance.

Budding revival signs in the broader economy and falling inflation rates had rekindled hopes that the RBI would lower loan rates to assist companies’ investment plans, critical to spin jobs and multiply income.

Rajan retained the repo rate — the rate at which banks borrow from RBI — at 8%, and kept the cash reserve ratio (CRR)– the proportion of deposits banks to have to park with the central bank — at 4%, in the bi-month monetary policy review.

Retail inflation eased in to a three-year low of 5.52% in October, below the central bank’s target of 6% by 2016.

India’s wholesale inflation rate — the main gauge to capture country-wide price movements — has also plunged to a five-year low of 1.77% in October, triggering a chorus of demand for lower borrowing costs to boost investment and consumer spending.

The next monetary policy is scheduled for February 3, 2015, but Rajan did not rule out a rate revision outside of the policy calendar depending on future price movements.

“A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” Rajan said.

Analysts said the RBI governor could wait for cues to come from the next year’s Union budget in February before initiating any rate action.

Industry leaders have been ratcheting up their demand for cheaper loans with the government also hoping that the central bank would signal a reversal of its prolonged hawkish stance that some see as affecting capacity expansion plans.

According to experts low and stable interest rates are critical to fast-track roads, ports, airports, and railways projects to create jobs, raise non-farm incomes and catalyse large scale industrialisation across India.

Rajan, however, made it abundantly clear that the RBI would not change its stance until the central bank was convinced to have fully tamed inflation.

“The way to sustainable growth is to have low and stable inflation. We are talking of years of sustainable growth,” he said.

The RBI governor said that the key to a turnaround in the growth path of the economy in the second half of the year is a revival in investment activity –- in new as well as stalled projects –- supported by fiscal consolidation, stronger export performance and lower overall inflation.

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