RBI policy: A cut in rate was expected; a cut in GDP growth target was not

It was widely expected that the Reserve Bank of India (RBI) would cut interest rates on Friday for two reasons. The first is that by now it has become a habit where low growth tendencies, which have taken precedence over the original goal of inflation targeting gets thumbs-up for a rate cut. The second is that over the last month or so, the government has announced various steps to revive the economy with the last measure being the corporate tax cut. A rate cut after all these announcements appeared to be a foregone decision.

The point of interest, however, was the quantum of the cut. The last time the Governor went in for 35 basis point (bps) cut, which was non-conventional and had popped up the choice between 25 bps and something more this time around. The RBI has settled for 25 bps this time.
Given that the 110 bps rate cut so far has not quite led to the uptick in investment, one can look upon the series of rate cuts as being work in progress to lower the cost of capital gradually over time so that when the investment cycle looks to pick up, potential investors would be comfortable with the rate regime. Also, given that there is a lot of hope being placed on the second half story working out where consumption picks up in both rural and urban sectors, a rate cut would provide an incentive to consumers to spend with support from finance. Read More

Article Source -> Business Standard