Tuesday, September 29, 2015

Repo Rate Cut - What Does It Mean for India?

"My name is Raghuram Rajan and I do what I do" - Rajan in a decisive mode (Courtesy NDTV)
Raghuram Rajan, the hallowed Governor of the Reserve Bank of India (RBI), caught everyone by surprise today by announcing a 50 basis points (bps) cut in the repo rate, which is down to 6.75%. While the corporate world can sing hosannas about capital now being available and bankers can go gaga in turn while slashing their own rates, there are a couple of points that can get overlooked in this hyperbole, and need to be seen at carefully.

The RBI has clearly noted that the availability of capital can be a potential problem in pushing for economic growth, due to which the forecast was redefined. It is particularly telling that the cut has come at the time of the initiation of disbursal of loans to small and medium enterprises under the MUDRA scheme. The cut complements the initiative of the government and its funded banks very well. This also shows that the RBI governor, unnecessarily labeled as a hawkish governor, has seen enough data to be convinced with the need for a rate cut, and that the rate cut can go towards the correct target audience. The governor has also pointed out that the banks need to pass on the benefit of the previous cuts as well, and has specifically stated that banks need to reduce lending rates by a total of 125 bps, which can bring big relief even for the real estate sector among others.

The RBI has pointed out that their growth forecast for the Indian economy has been slashed downwards from 7.6% to 7.4% . With Mr Rajan clearly stating that the RBI has done all that it can in terms of its monetary policy manoeuvring, the onus is now on the government to remove structural bottlenecks from the economy. The starting point for the same can be the implementation of the Goods and Services Tax (GST) which can easily boost the GDP by a few percentage points. Another area can be the dilution of government stake in public sector enterprises and market linked re-capitalization of public sector banks, both of which hold promise to reduce government's fiscal targets. The RBI is optimistic about the fiscal deficit target, and it is now upto the Finance Minister Arun Jaitley to live up to the hype created by the move. The governor has still sounded a word of caution on the prevailing global turmoil, and Mr Jaitley needs to now rise to the occassion.





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