Raghuram Rajan Surprises Again
- Central bank announced a surprise 50 basis point cut in repo rate.
- Rajan has cut key interest rates by 125 basis points so far this year.
- Most interest rate cuts in 2015 aided by big slump in commodity prices – particularly petroleum products.
- Interest rate on loans, including housing and vehicles, will come down along with interest rate on term deposits.
“My name is Raghuram Rajan. And I do what I do.” That may sound somewhat like James Bond, but that was the response of the Reserve Bank of India governor to media questions if he was no longer a hawk after the central bank announced a surprise 50 basis point cut in repo rate – a key policy rate that influences interest rate on loans from commercial banks.
Fifty basis point is equivalent to 0.5 per cent. Rajan has so far been focussed on suppressing inflation to a level that the RBI feels is acceptable, and that is been the reason why the bank has been reluctant to make any big cuts in interest rates. Yet, he has cut key interest rates by 125 basis points so far this calendar year.
Most of the interest rate cuts, the current one included, were aided mostly by a big slump in commodity prices, particularly of petroleum products, which helped ease inflationary pressures in the economy more rapidly than expected over the past nine months.
At this point, it is immaterial if the RBI governor and his colleagues acted independently or came under tremendous pressure mounted by the Centre and big corporates. The central bank’s move to cut interest rates by half a percentage point, which Rajan described as front-loaded, is pro-growth.
‘Front-Loaded’ Move
The move also signals that the bank is a lot more comfortable with the current level of inflation in the economy, and recognises that it is time industrial growth and domestic consumption was boosted, particularly given the tepid global growth.
The RBI has also signalled that it will continue to be accommodative in its stance, meaning there could be more interest cuts in the offing, though not necessarily another one this calendar year. But it will remain watchful of the risks to inflation, namely a spurt in global commodity prices and domestic food inflation caused by disappointing monsoons.
Its current assessment is that there will be some upward movement in inflation numbers, mostly due to base or denominator effect. This is because inflationary pressures began easing about a year ago. Overall, the RBI expects global commodity prices to remain subdued due to weakening of many large economies, most significantly China.
Predictably, the government, companies and exporters are happy. The pressure from the government on the RBI is expected to ease now, but that on commercial banks is set to rise. That means the interest changes will be a mixed bag for the common man. Interest rate on loans, including those on housing and vehicles, will come down in the next few months and so will interest rate on term deposits. Falling deposit rates will affect senior citizens the most, who are usually advised to keep their savings in relatively risk free terms deposits.
Cheaper cost of capital may help corporate investment activity revive in the next few quarters. However, as the RBI pointed out, the big boost to consumption is expected when the Pay Commission recommendations are accepted and implemented.
(The writer is a Delhi-based senior journalist)
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