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Economy

RBI Cuts Rates by 0.25% and We Told You So

Just three days ago, we wrote:

At this point we at Capital Mind believe the RBI is very likely to cut rates, even before the next meeting.

Because Inflation has looked like this:

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And The RBI Has Cut Rates Today

Raghuram Rajan, the RBI chief has announced a rate cut today:

In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met. Keeping this commitment in mind, it has been decided to:

  • reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect;

  • keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);

  • continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and

  • continue with daily variable rate repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75 per cent with immediate effect.

This is a 25 bps cut that is the first rate change in a year.

image image

So, we’re going to gloat and say we told you so. But this was darn easy because:

  • RBI said it would decide based on Dec inflation
  • RBI said it would do it mid-term if required (i.e. even in between meetings)

But then, we’re in this business where you have to scream from the rooftops. Apologies for all the drama.

What’s next?

RBI will continue to cut rates. But since the next meeting is only on Feb 3, 2015 it will not have more data points (next inflation data comes on Feb 12 or so) to decide. So we think it might not be the immediate next meeting (on Feb 3) but again, we will see a 25 bps cut in mid Feb. That’s when the policy will have clarity, and honestly, the one awesome thing the RBI has done is to bring clarity.

Because nearly everyone knew when and how much this rate cut would bring. But still, we told you so.

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