Reserve Bank of India (RBI)’s decision to keep policy rates unchanged was on expected lines. Amid rising credit demand and increasing inflationary pressures on the back of new drivers like oil prices and overheating in vegetables market, the central bank is heralding a tighter regime. The interest rates in India are probably heading towards a long pause.
The rate easing cycle that began in January 2015 has seen a reduction of 200 basis points (one basis point is equivalent to one-hundredth of a percentage) in repo rate, the rate at which RBI lends to banks, with the last cut being in August 2017. While retail customers will have to wait for long for any rate cut, there are chances that cost of funds could also start moving up. Analysts aver that there could be room for a rate cut only if the downside risks to growth materialise and inflation undershoots RBI’s growth forecast for the second half.
Meanwhile, RBI’s move to allow overseas branches of Indian banks to refinance external commercial borrowings (ECBs) of Indian companies will provide a fair chance to lenders to book and retain good quality assets. This means overseas branches or subsidiaries of Indian banks can refinance ECBs of AAA-rated corporates as well as Navratna and Maharatna PSUs by raising fresh ECBs.