RBI ends clinical trial on the economy; brings rate cuts

The RBI today has made a late but meager 25% basis point cut in the policy rate (repo rate) along with the same amount of reduction in the CRR. The current repo rate cut is the first one in the since April 2012.

                          RBI has observed that now it is critical to arrest growth momentum. Economy is registering cumulative decline in GDP growth rate during the last seven quarters. It is expected that this year, the Indian economy is going to register the lowest growth rate in the last ten years.

                          The central bank has not mentioned its failure to limit inflation through its unrelenting high interest rate policy. The high interest rate policy adopted to fight inflation has reduced consumption and investment which ultimately was the growth depressant during the last couple of years. In many other emerging market economies like China, central banks introduced rate cut oriented monetary stance to promote growth during the last one year.

                          The 25bps cut in CRR is aimed at easing liquidity to meet the busy period demand for money.  On the other hand, the 25 bps cut in Repo is a face saving attempt on part of the RBI to take part in the effort to bring momentum into the economy. The impact of the present repo cut on market interest rate will be quite insignificant. Financial market as well as the investor groups will not be ready to believe the RBI’s commitment on growth. Rather, they may continue to believe in the central bank’s inability to control inflation; whatever may be the harsh measures it follows.

                          Indirectly, the present adoption of a rate cut amidst continuing high level of inflation is a declaration of the RBI’s policy failure on inflation fighting. Recent data shows Inflation has registered a negligible natural decline rather than a response to the RBI’s policy response. It is interesting that the present rate cut comes at a time when inflation is continuing at its high level over the last two and a half years. RBI has destroyed growth, expecting that inflation may be contained by adopting high interest rate policy. Many economists and practicing central banks already skipped away from hard inflation targeting to concentrate on growth stimulation. But the RBI has not learned a lesson from the current global developments.