RBI governor Raghuram Rajan, in a surprise move on a day of multiple festivals, finally cut the repo rate (rate at which the Reserve Bank of India lends to banks) by a quarter per cent — from 8.0 per cent to 7.75 per cent — signalling the beginning of a monetary-easing regime. He could have been more generous and cut the repo rate by half a per cent; 25 basis points is too measly. It may be a few days before the banks pass on this benefit to borrowers who have been waiting impatiently for this to happen. One group has already announced an offer of loans at 7.99 per cent to home buyers.
However, the more important aspect of the rate cut is the recognition by Dr Rajan that the Narendra Modi government is serious about bringing in fiscal order and tackling the supply-side issues that have been plaguing the economy and fuelling inflation. The government, too, was taken by surprise.
Dr Rajan had indicated in his fifth bi-monthly monetary policy statement that if the December inflation figures continued their downward trend, he would be committed to initiating the process of monetary easing. The December inflation figures increased only by a fraction over November, but it was an indication of the continued slowdown in inflation. And Dr Rajan kept his word on Thursday.
It would have been unforgivable if he hadn’t considering that the environment was ripe for such a move with oil and commodity prices being at all-time lows and inflation too going south. The stock markets zoomed, with the Sensex rising 727 points. India Inc. is in a buoyant mood. The governor, however, cautioned that the key to further easing will be data that confirms continuing disinflationary pressures.
He also said that government would have to keep up sustained high-quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. It is now expected that investment, particularly by the private sector, will pick up after nearly over two years.
But, despite the euphoria over the rate cut, it is not likely to materialise in a hurry. Business and industry, whether big or small, will invest only when they see their investments won’t be stalled again by delays and red tape and lack of vital inputs like power and coal. The Prime Minister himself has promised to make India the best place to do business. Investors are still waiting to see things change on the ground. Corruption and red tape are still a reality, specially at the state level, and there is no sign of this abating.
Neither the Prime Minster nor his trouble-shooter Arun Jaitley, the Union finance minister, ever talk about corruption anymore. Yet corruption was Mr Modi’s main plank, along with development.
