Mixed signals from RBI

The Reserve Bank kept its key interest rate constant at 6.25 per cent as it monitors the impact demonetisation had on the economy. The general view is that the impact would be transient. It’s a matter of concern though that the central bank shifted its policy stance from accommodative to neutral, possibly signalling an end to rate cuts, and a future that could see rate hikes. Its focus seems to be on getting the consumer price index to an inflation target of five per cent by Q4 and four per cent in the medium term even while supporting growth. It’s in line with RBI governor Urjit Patel’s firm faith in keeping inflation down, that is often deemed hawkish. Interestingly the growth rate was kept at 6.9 per cent in FY17 and 7.4 per cent in FY18 , due to improving rural sector demand, affordable housing and infrastructure gains like roads and ports that got a boost in the recent Budget.

Monthly EMI payments are, however, unlikely to come down as banks claim they have already cut rates after being flush with funds following the currency swap. The RBI has said though that there’s room for further cuts as banks have passed on just around 80 per cent, against the 1.75 per cent RBI cut. The importance of lower rates is vital, specially for manufacturing that is languishing, and so is private investment.

The good news for harried consumers is that savings account withdrawal limits are being scrapped in phases: raised to `50,000 weekly from February 20 and all limits scrapped by mid-March.