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The current credit policy was eagerly awaited by many. Most analysts were expecting the Reserve Bank of India (RBI) to begin cutting down the key interest rates. In the light of the recent news on the growth front and lower GDP numbers, it was anticipated by banks as well as corporate. A cut in the reporate as well as a reduction in the cash reserve ratio (CRR) were hoped for.
However, contrary to expectations, the RBI chose to maintain status quo. There has been no change in either the CRR or the repo rate. The RBI has kept the CRR unchanged at 4.75 percent and the repo rate at eight percent. According to the RBI, although growth has moderated, inflation remains above the comfort levels. After a rate of 8.4 percent in two consecutive financial years, the GDP dropped to 6.5 percent in 2011-2012. The economy faces high inflation, slowing industrial growth, depreciating rupee and declining exports.
The RBI has noted that the country’s benchmark inflation rose in May to 7.55 percent, keeping price pressures elevated and making it harder for the RBI to revive economic growth. The rise in the Wholesale Price Index (WPI) from 7.23 percent in April came as both food and fuel prices picked up. The increase keeps inflation near its highest level this year. The future course of action depends on inflation. Bankers are still expecting a 25-50 basis points’ cut in the coming months.
Floating rate better
In case you are planning to buy a house with a home loan, it is better to go in for a floating rate scheme. It doesn’t make sense to opt for a fixed rate loan at this stage. Admittedly, the interest rates are on a slightly higher side at the moment. However, the interest rates will come down in the coming months. As the growth scenario has been impacted, there is a push from all sides for a reduction in the key interest rates. The high interest rate regime won’t last for long, especially considering the negative impact it has been having on growth. It is just the inflation concern that is forcing the RBI to hold back on a rate cut or cut in the CRR.
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