Why did RBI Governor surprise the markets with a repo cut of 50
basis points when everyone expected at the most a 25 basis point cut or even no
cut?
Mr Subbarao must have realized
that this is his best chance to do repo rate cut as he might not get another
opportunity in near future and he would then be blamed for further
deterioration in economic growth. Hence,
he used the cover of slight moderation in inflation and growth deceleration to
push through an above expected rate cut.
Let us consider the situation that he didn’t do any repo cut
now. What would have happened? He knows he cannot repeat later in the year.
The Consumer Price Index (CPI) number which came one day after
the policy announcement came in at a steep 9.5 percent. This would have made it virtually impossible
for Mr Subbarao to cut rates next month.
Another fact of the matter is that Government may anytime
announce a hike in petrol or diesel, or both after parliament session. That is
bound to stoke the inflation further which would have further reduced the scope
for repo cuts after April?
If oil prices are not hiked, a higher fiscal deficit will result
in India’s credit rating going for a toss. Either way, with or without an oil
price hike, scope for rate cuts will be limited.
If fuel prices are raised a bit and corporate can’t pass it on
due to weak pricing power it will again impact corporate profitability, which
will dampen equity markets further. If they do manage to pass it on, inflation
will be stoked.
Now if the equity markets are bad than Government will again
find it difficult to get a decent price for its disinvestment programme
especially after the fiasco that ensued during ONGC divestment process. This in
turn will lead to bigger fiscal deficit than budgeted and again the scope for reducing rates will be
negligible.
Conclusion
RBI Governor had to
cut rates in April monetary policy as he will find it exceedingly difficult to do so
in near future which could have lead to further deterioration in economic
growth of the country. While this is a positive news for equity markets for
sure, it is imperative that Government gets its act together soon as push
through the necessary reforms to justify his action and enable him to do
further cuts to support flagging economy..
