RBI Governor Raghuram Rajan surprised the markets by cutting the repo rate by 50 bps on Tuesday. The question that many asked was: Did he cave in to pressure from the government and India Inc? Most economists didn’t think so.

Would the cut now spur India Inc to start investing more? Economists didn’t think it would happen soon, although they expect banks to start cutting rates soon. Some of them are of the view that rate cuts would make no difference as there is simply no investment appetite.

Economists broadly welcomed the repo cut, expressing surprise at the quantum but also cautioned that the favourable inflation situation was not a sign that the economy was out of the woods yet.

SS Tarapore, Economist and former RBI Deputy Governor, while reiterating his preference that RBI should have waited till December before easing rates further, said: “RBI- government dialogue on monetary policy is a reality but it would not be fair or proper to say that RBI has “caved in” to government/large industry demands.” He also expressed concern about the adverse impact on household sector financial savings and its medium-term impact on growth.

According to Abheek Barua, Chief Economist, HDFC Bank, this might be the last cut for the financial year given that Raghuram Rajan views the aggressive rate cut as a ‘frontloading of policy easing’. Rajan, however, did not rule out the possibility of further rate cuts if external headwinds from weak global growth were to intensify and pull retail inflation below forecast.

Yield on the benchmark 10-year government bond has fallen by 14 basis points (bps) to 7.59 per cent and could soften further to 7.50 per cent in the near term.

HDFC Bank sees any rally in long-term local currency fixed income instruments as short-lived and global risk aversion returning as the primary driver behind market movements, he said.

DK Joshi, Chief Economist at rating agency Crisil, said the quantum of the cut was beyond expectation. He expected this to hasten the transmission to bank lending rates. Despite monsoon worries, food prices have behaved except in a few cases, he said, while cautioning that the economy is not out of the woods yet.  

TB Kapali, financial consultant, reiterated his views that RBI’s repo rate cut will not make much difference when Indian companies’ effective borrowing cost on forex debt is over 50 per cent. He said that forex debt stock is now a third of the total liabilities (bank loans plus forex debt) and companies are paying 50 per cent plus because of the rupee depreciating from 45 to 65 to a dollar. With that liability profile, they will not get any benefit even if the RBI cuts 300 bps, he said.

He added, “Indian industry is now suffering from a ‘stagflation’ environment, which has hit the overall economy.”

Rate cuts are no panacea, he said, while anticipating a painful adjustment period of three-four years.

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