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Raghuram Rajan exits RBI, Urjit Patel and co cut repo rate 25 bps; have things changed that much?

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Tue October 04 2016, 5:06 pm
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    Have things changed between the time former Governor Raghuram Rajan exited the RBI in September beginning and the new one Urjit Patel holding the first review meet in the beginning of October? But first, the announcement. New Governor Urjit Patel announced a 25 bps repo rate (short-term lending rate charged by the central bank on borrowings by commercial banks) cut to 6.25 per cent today in the wake of the RBI Monetary Policy review that took place for the first time in the presence of the Monetary Policy Committee (MPC) members of the Reserve Bank of India (RBI). The rate has been slashed now by RBI to its lowest since November 2010. This will have made banks and India Inc happy and the same applies to the Centre. Also if banks are willing to pass on the rate cut onwards, the common man can now see a possibility of actually getting to buy a house of his dreams and other big ticket items like cars, while those with big EMIs could be hoping for a reduction. However, this remains a hope as underlined by Urjit Patel himself when he said, "Cut in small saving rates should encourage banks to reduce lending rates." However, in effect, this is expected to be a big booster shot to the economy. Having said that, there is no doubt that a demand spike may well trigger a surge in inflation. (Express Photo - Nirmal Harindran)

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    This comes in the wake of the previous governor Raghuram Rajan exiting and new one Urjit Patel taking up the reigns alongside the MPC members - all the 6 members had agreed to the rate cut in its first meeting. Rajan was the last governor to have total responsibility about setting rates - the last meeting he chaired was in August, 2016. Rajan was blamed for restricting economic growth for not reducing interest rates. However, at the first opportunity, Urjit Patel has cut the rates thereby easing pressure on himself from the Centre and the Indian corporates. Have things changed much? No, the data is effectively same, after all how much can it change in a 2-month period? This step was also against what a majority of analysts had said would happen. In fact, the experts who said there would be a cut were in minority. Among the reasons cited were the 7th Pay Commission wage hikes of government staff that will tip inflation higher, and a good monsoon that will increase demand from rural India. However though rains will reduce food prices, food inflation remained a big uncertainty. (Express Photo - Nirmal Harindran)

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    On its part, the RBI did warn of risks. It said economic growth could be affected in 2017 as private investments was not up to mark while global demand was low and geopolitical risks high, all of them leading to tremendous uncertainty. (Express Photo - Nirmal Harindran)

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    In his presser, Governor Urjit Patel raised a few points. Here they are: 1. "It's possible IMF meet this week could further downgrade global growth, would be surprised if it doesn't'; 2. "No change in liquidity stance"; "For the first time in a long time, weak global demand is going to bring down trade volume; "Can expect further slowdown in global growth." (Express Photo - Nirmal Harindran)

  • The RBI said that the repo rate announced today indicated that the move was consistent with the accommodative stance of the cbank. The reaction from markets was immediate with rising from 28,250 points before the rate cut declaration to over 28,380 points almost immediately after. (Express Photo - Nirmal Harindran)

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