RBI may cut rates, finally

Weeks of debate culminating in the analysis of the inflation figures just released on Wednesday, have taken the view that the Reserve Bank of India (RBI) will most likely wait for April to begin to cut rates and do nothing on Thursday.

That, if we exclude bit of speculation reported in the bond markets today.

In reality, however, this policy review may not be a non-event. The RBI will, most likely, surprise the market by doing exactly the opposite.

Has the rate cycle peaked? This question is no longer relevant as it has been already answered by the RBI in the affirmative. Through its action of decisively pausing the rate hikes, through its formal pronouncements as also the public comments from the Governor and the Deputy Governor.

‘Comfortable' level

While the RBI has all along stated that it would like to see a ‘comfortable' level of inflation before reversing the rate policy, an important turning point came when it finally admitted, in its last review, that the tight policy has possibly started hurting growth.

So, when we are discussing cutting rates, we are talking of growth and not just inflation.

Consider the scenario where the RBI does not start cutting rates now, saying it would like to see inflation show much better numbers, anxieties on oil prices should reduce and, most importantly, the Budget should indicate the Government's roadmap for a better management of the fiscal side.

It needs no great analysis to understand that while inflation may surely budge, albeit slowly, it is very difficult to take a safe view on oil. The clincher, however, is fiscal management, where the RBI too is acutely aware of the leeway the Government actually has and the needed political will.

Take risk or play safe?

So if the RBI waits till April, it will have the unenviable task of taking a call on the fiscal side, having pointed fingers at the government occasionally in the recent past, even if justifiably.

And if it starts the rate-cutting cycle now, it would have done its bit for the growth concerns.

It may undertake a rate cut based on its ‘belief and confidence' that the government will have a plan for fiscal consolidation. In a sense, Thursday seems to be a great opportunity available for the central bank. In my view, the RBI will make use of it. It will take the risk — of playing safe.

The RBI also knows that, sometimes, the surprise element in the policy move or its timing is more potent than the actual move itself. No, it is not about the Sensex. It is about the economy. And economics is really about expectations and confidence. Even a token reduction of 25 basis points on the repo rate, may be the gift the RBI is wrapping up.

(The author is a management consultant. The views are personal.)

COMMENT NOW