Tuesday, April 5, 2016

RBI Cuts Rate - But Was It Enough?

Phew! What a grueling day in market today!! It has been a sea of red. Financials have been butchered with bears taking a firm grip.

Reason was simple and clear. Markets were expecting a 50 bps cut in repo rate but Raghuram Rajan delivered only 25 bps cut. This despite the fact that our Fin Minister himself had publicly indicated that he expected a 50 bps cut in repo rate from the Central Bank.

Nonetheless, why such despondency was witnessed in markets today? After all a rate cut was given by RBI and some liquidity measures were initiated. Why should a rate cut, however small, impact the markets so negatively?

I think the reason is that market participants wanted to send a message to Raghuram Rajan. And the message is that they do not appreciate his negative approach to growth.

To be frank, RBI Governor's actions have always been suspect, as if he is totally against growth in India. Take the instance of present situation as it exists in Indian economy. By his own admission today, RBI Governor is seeing consumer inflation at 5%, which is fairly pleasant as inflation goes. If inflation is under control, then it is high time to address the growth of economy which is in doldrums.

For kick-starting growth in Indian economy, we need job creation. Jobs can be created if industry goes into capex drive, meaning that capital expenditure has to be resorted to by industry captains to build extra capacity. Building extra capacity will require fresh jobs, which in turn will boost domestic consumption, thereby inviting more job creation and thus sending Indian economy into a virtuous path of positive growth spiral.

How is it so difficult for Raghuram Rajan, an economist of world renown, to understand? And when situation is so conducive from inflation side, it is simple to drive growth by substantially lowering rates. Industry has to be incentivized by lower rates so that they can borrow funds from banks and create extra capacity through capital expenditure.

This is what the markets had expected form RBI Governor and did not get. 25 bps rate cut is next to nothing. In fact some market watchers were expecting 100 bps, but 50 bps was the rock bottom expectation. Even after Finance Minister publicly hinting at 50 bps, Raghuram Rajan just could not care less for growth in Indian economy. This is at a time when Govt has done everything possible for fiscal consolidation.

Wonder who exactly is Raghuram Rajan working for? India's growth has suffered a lot at Raghuram Rajan's hands. As his term comes to an end this September, we hope to get a more positive RBI Governor to guide India with proactive monetary policies.

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