Expert Zone
Straight from the Specialists
Why the RBI should cut rates again
(Any opinions expressed here are those of the author and not of Thomson Reuters)
In May, the Reserve Bank of India (RBI) had hesitatingly cut the repo rate by 0.25 percent, which made no impression on the stock market or commercial banks. That was because both expected the cut to be more substantial. But the RBI had not obliged.
Perhaps the monsoon, which arrived on the dot and is progressing satisfactorily, may make some difference to the RBI’s expectations of food inflation – which had been its principal reason for hesitancy. While it’s too early to predict monsoon behaviour for the rest of the season and the likely improvement in agricultural production, it does appear the improvement should be significant and inflation dampened perceptibly. Reduction in inflation, however, is not the only reason why the interest rate should have been cut.
The other reason is to stimulate investment and enhance growth that is necessary to generate employment. Higher interest payments eat into earnings and reduce net profitability. In the quarter ending March 2013, interest payments were 29 percent of profits before tax. A 2 percent reduction in interest rate would increase net profits by 6 percent.
Interest rate matters. Most countries within sight of recession have taken every possible measure to reduce the interest rate. In countries such as Japan, even the nominal interest rate has been close to zero. In the United States, the real interest rate (nominal interest rate minus the rate of inflation) has been negative. We are among the few with an over 7 percent rate.
RBI needs to take bold steps
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Expectations of a rate cut were legitimate. But the RBI preferred to pause, not quite convinced that inflation is under control. That has been its singular target though it is dressed up to look more appealing as growth-inflation dynamics.
Time to think beyond monetary policy rates?
(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)
Irrespective of the RBI monetary policy review and its outcome, the fact that policy rates have assumed such obsessive focus needs closer scrutiny.
The end of repo rate hike?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Apparently, the RBI is exasperated. After 18 months of inflation and 13 hikes in repo rate, RBI Governor Duvvuri Subbarao more or less admitted a day before Diwali that the pursuit of interest policy had gone far enough even though it hardly made any different to inflation and only deflated the growth rate instead. But he is not without hope.
