The name is Rajan, Raghuram Rajan
This Tuesday, Rajan can certainly justify the swagger with which he spoke at the post-policy press conference
“My name is Raghuram Rajan and I do what I do,” joked the Reserve Bank of India (RBI) governor when asked whether the central bank’s outlook was hawkish while the policy statement is dovish.
This Tuesday, Rajan can certainly justify the swagger with which he spoke at the post-policy press conference. In one clean shot, RBI has silenced critics who were insisting that growth in the economy was being held back by the high real interest rates in the economy. Many, including finance minister Arun Jaitley, had publicly called for lower interest rates from the central bank.
I’ll see your demand for a 25 basis point cut and raise it by another 25 basis points, RBI seemed to say as it announced a steeper-than-expected 50 basis points cut in the policy rate to 6.75%.
One basis point is one-hundredth of a percentage point.
On a more serious note, though, RBI’s decision was driven by a number of domestic and global factors. Domestically, the enabling factors for a rate cut had been put in place, with consumer price inflation remaining in check (In August, consumer price index rose 3.66% compared with 3.78% in July).
“The ebbing of inflation in the year so far is due to a combination of low month-on-month increases in prices and favourable base effects,” said RBI in its policy statement and went on to add that the weakening of global activity suggests that commodity prices will remain contained for a while.
Growth, however, remains sluggish, forcing the central bank to bring down its growth projection for 2015-16 to 7.4% from the earlier forecast of 7.6%.
“Underlying economic activity, however, remains weak on account of the sustained decline in exports, rainfall deficiency and weaker-than-expected momentum in industrial production and investment activity,” said RBI.
Keeping those two domestic factors in mind against the backdrop of a weakening global economy, Rajan appears to have taken a leap of faith and frontloaded 50 basis points in rate cuts. The onus now shifts to banks to ensure that these rate cuts are passed on.
There was another reason that Rajan earned his Bond-like reputation today (no pun intended). Rajan announced that RBI will gradually increase the foreign investment limit in central government bonds to 5% of the outstanding stock of government securities by March 2018.
The first of these hikes will be effective 12 October when limits would be increased by Rs.13,000 crore. RBI has also, for the first time, opened up the state government bond market for foreign investment.
The bond markets are rejoicing. The benchmark 10-year yield has fallen to a two-year low of 7.57%, both on account of the steeper-than-expected rate cuts and the hike in foreign investment limits.
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