Reserve Bank of India governor Raghuram Rajan surprised markets on Thursday by making money cheaper to borrow. Industry and the government had been pushing Rajan to make rate cuts for months now, but most analysts expected any such changes to only come closer to the end of the fiscal year, around March. Instead, on Thursday, Rajan cut the repo rate, which is the central bank’s key lending rate, by a quarter of a percentage point.
Wishing Indians on the occasion of various harvest festivals being celebrated around the country, the governor, in a statement on the RBI website, said developments over the last few months have “provided headroom for a shift in the monetary policy stance”.
Rajan noted that he had said a rate cut might be looked at outside the regular policy review cycle for early 2015, and with this change to the repo rate, that’s exactly what has happened. Both industry and government will also be cheerful, because this gives the central bank an opportunity to test the waters and see if rates can be cut even more once the budget has been announced.
But what prompted the central bank to pitch this surprise rate cut? Rajan pointed to two main reasons: the price of crude oil and inflation. Both of those metrics have fallen off a cliff in the last few months, giving the government a much greater chance of staying within its fiscal deficit target.
Wholesale inflation had already shown promising signs through the latter half of 2014, with the number falling to 0% in November, and only inching up to 0.11% in December. Analysts had expected a 0.4% increase, so the smaller number made it clear that the aim of wrangling inflation until it becomes manageable is one task that the government and monetary policy has been able to achieve some success at. The Consumer Price Index also came in under expectations, meaning the central bank would be less concerned about the negative side-effects of putting more money into the system by lowering the lending rates.
Even more surprising than inflation becoming so manageable has been the steep fall in crude oil prices over the last few months. From more than a $100 a barrel at the start of 2014 to under $50 this month, the precipitous drop has meant that the government’s import expenses have come down tremendously. The causes of the drop has been attributed to everything from a Western conspiracy to hurt Russia, to a Saudi plot to damage America’s shale gas industry to the Saudi-Iran rivalry, but most analysts are confident that prices will not rebound any time soon. This gives India a stable platform from which to hope for higher growth over 2015.
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Wishing Indians on the occasion of various harvest festivals being celebrated around the country, the governor, in a statement on the RBI website, said developments over the last few months have “provided headroom for a shift in the monetary policy stance”.
Rajan noted that he had said a rate cut might be looked at outside the regular policy review cycle for early 2015, and with this change to the repo rate, that’s exactly what has happened. Both industry and government will also be cheerful, because this gives the central bank an opportunity to test the waters and see if rates can be cut even more once the budget has been announced.
But what prompted the central bank to pitch this surprise rate cut? Rajan pointed to two main reasons: the price of crude oil and inflation. Both of those metrics have fallen off a cliff in the last few months, giving the government a much greater chance of staying within its fiscal deficit target.
Wholesale inflation had already shown promising signs through the latter half of 2014, with the number falling to 0% in November, and only inching up to 0.11% in December. Analysts had expected a 0.4% increase, so the smaller number made it clear that the aim of wrangling inflation until it becomes manageable is one task that the government and monetary policy has been able to achieve some success at. The Consumer Price Index also came in under expectations, meaning the central bank would be less concerned about the negative side-effects of putting more money into the system by lowering the lending rates.
Even more surprising than inflation becoming so manageable has been the steep fall in crude oil prices over the last few months. From more than a $100 a barrel at the start of 2014 to under $50 this month, the precipitous drop has meant that the government’s import expenses have come down tremendously. The causes of the drop has been attributed to everything from a Western conspiracy to hurt Russia, to a Saudi plot to damage America’s shale gas industry to the Saudi-Iran rivalry, but most analysts are confident that prices will not rebound any time soon. This gives India a stable platform from which to hope for higher growth over 2015.