Rate-cut has come. Now it’s Government’s turn
After months of dawdling, often with good reason, the Reserve Bank of India has sprung a pleasant surprise by reducing the interest rate by 25 basis points ahead of its monetary policy review meeting on February 3. The decision has come in the backdrop of Wholesale Price Index inflation easing over the last couple of months, even reaching zero per cent in November 2014 and inching only slightly higher at 0.11 per cent the following month. Prices of vegetables have stabilised and international fuel prices have dropped by more than half in the last six months.
All these developments have had a positive impact on the economic situation in the country. Coupled with the Narendra Modi Government's aggressive push to enhance growth, the developments seemed ripe for a rate cut. Experts across the industry, markets and the political spectrum had been offering gentle hints that the time had arrived for the RBI to review the interest rate. Governor Raghuram Rajan had, however, held out on the ground that a slash in the rates should come only after clear indications were available of sustainability in the inflationary trends.
He had added, and rightly so, that the RBI could not indulge in knee-jerk reactions that it may have to reconsider soon enough. It is clear from the central bank's Thursday decision that Mr Rajan has come around to the view that a cut is now desirable. Indeed, the RBI had maintained the eight per cent rate since January 2014 and resisted pressure from various quarters to reduce. The RBI's latest decision also means that the bank and its Governor now believe the downward inflationary indications are there to stay — or at least they are no susceptible to wild north-bound fluctuations. The surprise element has been added because many were expecting the reduction to be announced by the RBI at its February 3 meeting. Now, it remains to be seen for how long the reduced rates remain in place.
The immediate impact of the cut will be felt across the economic arena. While the markets and industry have much to cheer, it will also bring cheer to the consumers who are saddled with loans. They will be now paying a smaller sum with the reduction of interest rate which the consumer-lending banks will now undertake. The RBI's decision matches excellently with the overall objectives of the Government, and it can be said more accurately than before that the RBI, the Government and its financial advisors are on the same page.
The Thursday decision should also silence voices which were claiming that the Government and Mr Rajan were on a collision course, with Union Minister for Finance Arun Jaitley especially being unhappy with the Governor's alleged intransigence. In any case, Mr Rajan had broadly hinted at a rate cut some weeks ago when he acknowledged the easing of inflation given the emerging trends.
But the economy does not depend only on interest rate cuts to bloom; a sound monetary policy is just one of the contributing factors. The fiscal policies of the Union Government hold the key to revival. So far, indications from there have been encouraging. A bit more aggression and out-of-the-box thinking ahead of the Budget, in the Budget and thereafter, will be welcome.