Hopes high for interest rate cut

‘Industry and markets will take it as a pro-growth signal and EMIs will come down’

The Reserve Bank of India is scheduled to announce on Tuesday its first review of monetary policy after the Modi government assumed office. Though the polls put out by most research houses show that the money markets are expecting RBI Governor Raghuram Rajan to hold interest rates steady, senior Finance Ministry officials told The Hindu that they “won’t be surprised if he announced a rate cut.”

Lowering of interest rates will be conducive to the Modi government’s agenda for the economy’s revival as lower borrowing costs encourage investments and spur growth. Mr. Rajan met with Prime Minister Narendra Modi on Sunday evening. The RBI Governor has an independent call on interest rates.

The reason behind the expectation of a rate cut is that the RBI has since December left interest rates untouched. “Even though the inflation data available then would have justified a cut, the Governor had surprised the markets by keeping the rate steady…. one of his reasons could have been that it would be better do so after a new government takes office.”

The Hindu has learnt that the RBI board discussed at its last meeting if a cut at this stage would stoke inflation. “If Rajan does cut rates by even a quarter percentage point, not only will the industry and markets take it as a positive pro-growth signal, even the EMIs for home loan borrowers could come down slightly,” said the sources.