RBI policy review: Raghuram Rajan expected to cut interest rates

Reserve Bank of India (RBI) governor Raghuram Rajan is expected to lower key interest rates by at least 0.25 percentage points in the central bank’s first bi-monthly monetary policy review for 2016-17 on Tuesday.

If a rate cut takes place, it is expected to be passed on to consumers quickly as the marginal cost of fund-based lending rate calculation kicked in from April 1. The method uses incremental deposits against average deposits to calculate banks’ cost of deposits — a parameter for setting loan rates — and is expected to aid monetary policy transmission. SBI, HDFC Bank, Punjab National Bank, Bank of Baroda and Canara Bank have already announced lending rate cuts.

So, expect a fall in your home and auto loan EMIs soon.

The cut in rates has been widely anticipated by bankers and economists, thanks to a lower inflation outlook. Consumer price index (CPI)-based inflation, which the RBI uses as a benchmark to set rates, fell to 5.2% in February.

“The future inflation trajectory beckons more hope and for a major part of the current fiscal, inflation could well be below 5%. The stage is now set for a possible repo rate cut on April 5,” State Bank of India said in a statement.

In the previous monetary policy review on February 2, the RBI kept the repo rate — the rate at which banks borrow from the RBI — unchanged at 6.75%.

In 2015, the RBI had cut the repo rate by 1.25 percentage points, but banks reduced rates only by 0.70 percentage points.

“I think there is room for another 0.25 percentage point cut. There could be some liquidity measures also,” said Saugata Bhattacharya, chief economist at Axis Bank.

“We see a 25 percentage point cut in repo rate,” said NS Venkatesh, CFO, IDBI Bank