Big News
RBI announces 50bps rate cut
Ceding to impassioned calls by corporate India, not to mention Finance Minister Arun Jaitley, the Reserve Bank of India on Friday cut the repurchase, or repo, rate by 50 basis points to 6.75%, the lowest the key interest rate has been in four years.
The cut means that the repo rate has been cut by 100 basis points this year; however, this is the first to be announced at a policy review – the first two cuts of 25 bps each in January and March were both outside of the policy review schedule.
The lowering of the cut is also of a keeping with forecasts: a Reuters poll of 51 economists had shown that an overwhelming majority – 45, to be precise – had said it was likely that Governor Raghuram Rajan would lower the policy rate.
Clearly, RBI is telegraphing that:
* they were wrong about inflation, and it is dead
* rates were much too high
Economists widely expected a 0-25 bps cut. 50bps is a huge cut, and signals that the RBI is now in agreement with FinMin that rates needed a major haircut.
Bloomberg is also screaming the news:
Rajan Unexpectedly Cuts India Rate More Than Economists Expected
India’s central bank lowered interest rates more than expected to bolster the economy as China’s slowdown threatens global growth and a commodity rout contains inflation.
Governor Raghuram Rajan cut the benchmark repurchase rate to 6.75 percent from 7.25 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday. The move was predicted by one of 52 economists in a Bloomberg survey. Forty two expected a quarter-point cut and nine saw no change.
“The weakening of global activity since our last review suggests that commodity prices will remain contained for awhile,” Rajan said. Stronger domestic demand is needed to substitute for weaker global growth, he said, adding that “monetary policy has to be accommodative to the extent possible” in current conditions.
“Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow,” he said.
Rajan had faced growing pressure from Prime Minister Narendra Modi’s government to reduce one of Asia’s highest borrowing costs as Indian growth and price pressures slowed. Rajan is looking to keep inflation within 6 percent by January, 5 percent a year later and near 4 percent by early 2018.
The quantum of the rate cut is so large that only 1 of 52 analysts projected it. The majority saw a 25bps cut and the rest followed Rajan's hawkish posture and projected no rate cut at all.
So much for the recent talk of 'GoI should not be begging for a rate cut' - RBI pretty much fell over themselves to do a huge one just now. far more than anyone expected, and vindicating GoI's position.
