Transmission of interest rates
Bank management has to decide on cuts. Although the overall credit growth is low, the financing is good, thanks to large corporations applying for loans. Thus banks will have to lend and be competitive; thus they would need to lower rates. RBI is hopeful that the banks will judge the competition and pass on rate cuts to the end-customers. Many banks have reduced their deposit rates but haven't reduced their lending rates so that they can repair the balance sheet with the earnings on spreads.
Exchange rates
The current exchange rates of rupee are competitive. Our exchange rate may be weak vis-a -vis the dollar but we have strengthened against all the other currencies. RBI doesn't intervene to try and target a particular rate. RBI's intervention is never unidirectional, It is in both the ways so as to reduce volatility. There are risks of rupee becoming uncompetitive in the future due to the massive quantitative easing going on in the world.
Rate cut possibilities
There are no substantial new developments on the disinflationary process or on the fiscal outlook since January 15. It is appropriate for RBI to await them and maintain the current interest rate stance. The Union budget, which reflects a significant change in the fiscal space, will be a major event to decide on the further rate movement. Also, the new GDP numbers to be published on February 9, which will reflect the whole new view of the economy and the inflation numbers, are the figures to watch out for. Monetary policy is a long-term process which follows its due course, and RBI will stay put on its earlier statement in December of embarking on a change in direction with respect to rates.
Growth
Growth prospects have improved slightly owing to drop in real interest rates from decline in oil prices, disinflation and progress achieved on stalled projects. RBI has maintained the GDP growth rate at 5.5% for 2014-15 using the old GDP base. For 2015 the growth rate will depend on the outlook for south-west monsoon and risks pertaining to the global economy. The revised GDP (with base year 2011-12) released on January 30 and with advance estimates for 2014-15 to be released on February 9, 2015 could result in revisions of RBI growth projections for 2015-16.
Inflation
The price of electricity, coal and cooking gas remained stable thus CPI registered a monthly decline since February 2014. Going forward, the forces in play which effect inflation are expected to be favourable. Low oil prices, relatively stable rupee and some action on food management is expected to keep the general prices low. Although RBI will keep an eye on the vegetable prices going forward as March is the season when vegetable prices pick up, it expects the inflation level to be around 6% by January 2016.
Economy
India is moving towards the consumption of services, and away from the consumption of manufacturing. The initiatives taken in land acquisition and efforts to increase mining activity along with widening the scope of FDI in defence and railways will help industrial revival.
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