MONEY WISE - Interest rate outlook positive for borrowers


MONEY WISE - Interest rate outlook positive for borrowers


One of the main reasons cited by the Reserve Bank of India (RBI) for not reducing the policy interest rates in the recent Credit Policy review was its concern on the inflation rate as well as inflationary forces.

In fact, it decided to change the stance from accommodative to neutral in keeping with the 4% medium-term inflation target. The RBI was of the view that the persistence of inflation, excluding in food and fuel, could limit further downward movement in the headline inflation rate and trigger second-order effects The central bank projected an inflation rate in the range of 44.50% for the first half of the financial year and in the range of 4.5-5% in the second half, even as it holds a 5% inflation target for March 2017.

Some good news is now coming in on the inflation front. The retail inflation rate cooled to a five-year low in January 2017, in the main due to the sliding vegetable and food prices. Vegetable prices fell by an annual 15.60% in January, while the prices of pulses contracted by 6.60%.

According to the data released by the Central Statistics Office (CSO), inflation, as measured by the Consumer Price Index (CPI), went up by 3.20% in January 2017, slower than the previous month's 3.40% and below the 5.70% recorded in the same month last year. Further, this is the slowest retail inflation rate growth reading in the current series, which was introduced in 2012.

The rural areas saw a slightly higher inflation rate at 3.40%, while in the urban areas it was 2.90%. The Consumer Food Price Index slowed to 0.50% in January 2017, from the previous month's 1.40%.

In rural areas, the food price inflation was 1.10%, while in urban centres it fell by 0.50% as prices of vegetables and food items softened. The decline in the food price inflation rate was largely driven by the negative 15.60% inflation in vegetables. The lower 1.34% inflation in pulses also helped.

The non-food components have registered an increase because of the higher global commodity prices and rising crude oil prices. The core CPI-based inflation rate, excluding food and fuel, went up to 5.10% in January 2017, from 4.90% in December 2016, suggesting stickiness in prices.

SO, WHAT DOES ALL THIS MEAN?

Although the inflation rate has come down, it did not lead to an immediate reduction in the policy interest rates. But, it will certainly be a positive factor to be considered by the RBI in its campaign against inflation.

This is indeed a positive vibe for the RBI, which it will consider while deciding on the direction of the interest rates. If this trend continues and the inflationary forces remain within the acceptable limit set by the RBI, you can expect some rate cuts.

For home loan borrowers, it is advisable to continue sticking to a floating rate of interest. Another interest rate reduction cycle will definitely commence in the coming months. It is just a question of timing and ensuring the risks of inflation are under control.                                           

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