By Saloni Shukla | ET Bureau | Aug 22, 2016, 09.35 AM IST
Mumbai: Prospective home and car buyers who were holding their breath might as well exhale as interest rates are unlikely to fall anytime soon.
Designated RBI Governor Urjit Patel is seen by many as much as an inflation hawk as outgoing Governor Raghuram Rajan and is likely to continue with his predecessor’s hawkish stance.
It was the committee headed by Deputy Governor Urjit Patel that recommended the 2 per cent to 6 per cent inflation target range and also suggested that interest rate decisions should be taken by a group of members rather than left to the sole discretion of the RBI governor. “It will be a fine balance for him (Urjit Patel),” a banker, who did not wish to be identified, said.”While he is the first RBI governor nominated by the Modi government, he is also cut out of the same cloth as Rajan is.”
But it also signals continuity of RBI’s policies as Patel’s views on inflation targeting and fiscal policy are same as that of the incumbent governor Raghuram Rajan.
“A negative near-term impact on the rates market is likely, as Patel is considered equally hawkish as his predecessor Rajan, if not more so. Thus, expectations of significant policy easing are likely to fade,” Standard Chartered said in a note. The RBI policy rate which currently is 6.5 per cent has been cut by 150 basis points since the start of 2015. The benchmark lending rate of State Bank of IndiaBSE -0.14 %, India’s largest bank, has dropped just 90 bps. SBI recently reduced its one year marginal cost of lending rate to 9.1 per cent. SBI offers home loans at 20 bps above MCLR to women and 25 bps over MCLR to other borrowers. Effectively, the home loan rate for SBI currently is 9.3 per cent for women and 9.35 per cent for others.
Patel’s appointment also comes as a time when the governor’s power in deciding monetary policy has been diluted significantly.Outgoing governor Rajan will be the last to enjoy absolute power in deciding interest rates. “If you are looking at interest rates, we are going to go on the basis of monetary policy committee now,” Madan Sabnavis of CARE Ratings said.
“The MPC is already put a target rate of 4 per cent with a band of 2 per cent so whether or not the governor of RBI is an inflation hawk, the power to change interest rates will lie with the committee. To top it all, we have said that the RBI governor will also not have the overriding power unless it is a tie.” When Patel takes over from Rajan in September, he along with five other members, will decide on rates. In June, the government formally notified the monetary policy committee, which shift the responsibility of setting interest rates to a sixmember committee, including the governor, with the governor getting a casting vote in case of a tie. Three members of the committee will be from the RBI while others will be appointed by the government. Those appointments are yet to be made.
Latest inflation numbers indicate that retail inflation rose to a 23month high of 6 per cent in July, mainly due to higher food prices.
Source : http://goo.gl/FpqaGi