Rate cut no surprise

Repo rate cut by 25 basis points to 7.5% from 7.75% has cheered markets and India Inc. Markets zoomed to record highs, though unable to sustain the gains in latter session. Analysts say rate cut is not a much surprise, as it was being debated and discussed throughout and the market had already discounted it. In fact, the market is in an overbought position, a reason for immediate retreat of the indices. Explaining rationale for the rate cut, RBI Governor Raghuram Rajan says, “Given low capacity utilisation and still-weak indicators of production and credit offtake, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation."

Of course, the budget has brought in very valuable structural reforms which will help the economy in improving supply side in the medium term. Besides, the government and the RBI had agreed to adopt inflation targeting. Of course, the central bank had been effectively using targets since early 2014. Perhaps, it may be the reason, apart from the inflation data, and at last, Rajan is convinced about the government's preparedness to fight out the inflation.

This has prompted RBI to deviate for the second time in cutting the interest rates. First time, RBI cut the repo rate in mid-January, off the policy cycle; Nifty hit the roof by about 230 points. By choosing a different course on the rate cuts, Rajan may be hinting to the markets not to speculate on the rate cut. And this will help the small investor not lose due to wild speculation – a positive development. But if we go by Rajan's assertion that he will take data into consideration while taking a decision on rate cuts, it is difficult to accept that the inflation is under control, more so, when the petrol and diesel rates are rising and Budget raised service tax to 14%, which indicate that prices of essential commodities would further increase.

Thus, the inflation will surely rise in the coming months. Hence, the question still holds as to why the rate cut now and why outside the policy review cycle? Is the central bank planning to depart from the traditional practice of taking decision on rates during the policy review? Time only will answer these questions. Whatever may be the reason for the rate cut, it is now the turn of the banks to pass the benefit to their consumers. And they will do, hopefully. In effect, there must be a significant fall in EMIs, as RBI has signalled the lower interest regime. Expectedly, the interest rates should fall from April 1, as the bank chiefs have already been airing their opinions and giving assurances that they will take a call on the cut in base rates.