Reasons of Repo Rate Cut by RBI

Finally RBI has cut down the Repo rate by 25 basis points from 8% to 7.75% and stock market responded as expected with the prices of different stocks from different sectors saw sharp rise. But question arises why RBI has taken this step of cutting repo rate at this time while it was ignoring the same demand from industry and financial sector since last 6 months as the inflation had not very high since July 2014. Answer of this question obviously not easy one but what I think is as discussed below.

RBI had been a conservative regulator in the world reflecting the typical Indian attitude that tries to lower down risks on vital and important issues relating mass interest and it remains to the same even in times of current governor Raghuram Rajan. So stemming from this cultural attitude RBI had been very observant and conscious about the inflation and it wanted to ensure that economy again would not undergo the inflationary pressure. Perhaps this six month period was enough for RBI to have confidence that the present economic scenarios would be favorable enough to take this rate cut decision.

Along with the lower inflation in the economy, global economic scenario is now a cause of concern for RBI and other regulators across the world. The world economy is again showing signs of slowdown. Europe again seems to be falling into its own traps with Greece leading towards grave economic issues. Also the falling oil prices is now a concern for the whole world as there are a number of countries that are highly dependent on oil for their revenues and falling prices would result into lower revenues for these countries leading to lower demands for goods and services. Countries like Russia, Iran and other Arabian countries are facing the heat of falling oil prices. This will as a whole increase the problems relating to slowdown in world economy.

On the other hand, falling oil prices are good for country like India which has to import most of its oil from other countries. This would help to save huge amount spent on imports. But this gain is not enough to compensate for the possible losses due to economic slowdown in rest of the world. This can only be compensated by increasing growth rate in economy and for that low cost money is must. So RBI seems to have considered these issues while taking decisions relating to rate cut and it is quite possible that in next review another rate cut may be possible and this time more direct.