Home / Editorial / RBI continues to surprise: Cuts repo rate by 25 bps ahead of schedule once again

RBI continues to surprise: Cuts repo rate by 25 bps ahead of schedule once again

Mumbai,Shubhashish: Raghuram Rajan, governor, Reserve Bank of India (RBI), seems to enjoying surprising the markets by cutting rates unannounced and ahead of monetary policy reviews.

After the rate cut on January 15, the Bank has cut rates by 25 basis points on Wednesday morning bringing the key repo rate down to 7.50%. Rajan said, “Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.

He gave two factors to defend his second surprise rate cut before the monetary policy. First, the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance. “Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate,” Rajan said.

Giving reasons for this second surprise, Rajan said, “Inflation in January 2015 at 5.1% as measured by the new index was well within the target of 8% for January 2015.”

He said that prices of vegetables declined and, inflation excluding food and fuel moderated in a broad-based manner to a new low.

“Thus, disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged,” he said.

Rajan, however, cautioned against hardening of oil prices over the past few weeks because of uncertainties surrounding geopolitical events across the globe. He said that these events have the power to alter inflation outlook of the RBI.

Rajan said that the most significant influences on near-term inflation will be the strength of aggregate demand relative to available capacity. He said, “Yet the picture it presents of a robust economy, with growth having picked up significantly over the last three years, is at odds with still-low direct measures of growth of production, credit, imports and capacity utilisation as well as with anecdotal evidence on the state of the economic cycle. Nevertheless, the picture of a steadily recovering economy appears right.”

He said that the Union Budget announced by Finance Minister Arun Jaitley on February 28 will help improve supply in the medium term. He cautioned, “In the short run, however, the postponement of fiscal consolidation to the 3 per cent target by one year will add to aggregate demand. At a time of accelerating economic recovery, this is, prima facie, a source for concern from the standpoint of aggregate demand management, especially with large borrowings intended for public sector enterprises.”

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