Cut to the chase now

1. CUT TO THE CHASE
NOW
ON THE BALL RBI governor surprises with 50bps cut
in repo rate, cheering industry and Govt. Prunes
economic growth forecast to 7.4%
Rolls out measures to deepen financial markets
India Inc set to get access to cheaper funds

2. Contd..
It was a throwaway line by the Reserve Bank of India governor at his press
conference but it was spot on: “I'm Raghuram Rajan and I do what I do.“ It
exemplified RBI's monetary policy action on Tuesday -a rate cut that was deeper
than expected from a man who's made the war on inflation his main focus. That
was accompanied by a number of measures aimed at bolstering the monetary
policy framework, improving the efficiency of the banking system, broadening and
deepening the financial markets, coping with stressed corporate and financial
assets and widening access to financial services. In so doing, the bank went a long
way toward setting India on the path of lower interest rates.
“The Reserve Bank has front-loaded policy action“ because a lot of things are going
India's way , except perhaps for the monsoon, Rajan said, indicating that the rate-
reduction cycle hadn't necessarily come to an end. But he made the point that cuts
need to be transmitted to the broader economy to have real effect.

3. Contd..
“While the Reserve Bank's stance will continue to be accommodative, the focus of
monetary action for the near term will shift to working with the government to
ensure that impediments to banks passing on the bulk of the cumulative 125 basis
points cut (since January) in the policy rate are removed,“ Rajan said. In a vote of
confidence, stocks and bonds rose while the rupee strengthened, generally unusual
behaviour for a currency in the context of a rate cut.
The government and industry welcomed the move and pledged support.
Banks responded by paring rates and the government said it would do what was
needed to ensure fiscal discipline was maintained and prices were kept under
check.
“The government is fully committed in meeting the fiscal deficit targets in order to
consolidate the gains achieved by the contained inflation,“ Finance Minister Arun
Jaitley said at a press conference. “There will be a need to have a constant vigilance
now on the inflation front.“

4. Contd..
Though prices have slowed dramatically in the recent past, RBI's focus won't
waver.
“The Reserve Bank will continue to be vigilant for signs that monetary policy
adjustments are needed to keep the economy on the target disinflationary
path,“ he said.“Given our year-ahead projections of inflation, this ensures
one-year expected treasury bill real interest rates of about 1.5-2.0%, which
are appropriate for this stage of the recovery.“
LOWER GROWTH FORECAST
The poor investment climate and lack of demand led the central bank to
lower its economic growth forecast by 20 basis points to 7.4% from 7.6%.
The central bank cut the repo rate at which it lends to banks by 50 basis
points, or half a percentage point, compared with the overwhelming
expectation of 25 basis points, to 6.75%, the lowest in fourand-a-half years.

5. Contd..
Apart from this, the governor said foreigners will be allowed to buy more
government bonds, effectively pushing rates lower, and the regulator will
work with the government to bring down interest rates on small savings.
Banks have blamed this for keeping them from reducing lending rates.
The central bank kept aside fears of inflation rearing up again as it sees a
weakening global economy as the bigger threat. It forecast inflation for
January 2017 at 5%, in line with its target, which means policy rates could be
cut by another 50 basis points in the next 12 months if the trajectory on
prices is maintained.
The sharper-than-expected cut will buoy sentiment.
“Investment is likely to respond more strongly if there is more certainty
about the extent of monetary stimulus in the pipeline, even if transmission is
slow,“ Rajan said.

6. Contd..
DALAL ST CONFUSED INITIALLY
The equity market reacted with confusion and disappointment before the full
import of RBI's policy pronouncement sunk in. Having fallen as much as 1.3%, the
Sensex recovered about 162 points to end 0.63% higher at 25,778.66. The Nifty
ended 0.61% up at 7,843. Benchmark government bonds had one of their best days
in recent times with yields tumbling 12 basis points to 7.61%. Bond yields and
prices move in opposite directions. The rupee gained 0.15% against the dollar to
65.95.
Rajan, who has waged a relentless battle against inflation, has for the first time in
more than two years since taking over expressed confidence that the consumer
price index could glide to the January 2017 estimate cited above and manage to
reach the 4% mediumterm target. While global commodity prices have been easing
for more than a year, concerns about them rebounding have given way to belief
that they are likely to remain depressed as the Chinese economy stumbles.

7. Contd..
“The 50-basis-point rate cut and the opening of FPI (foreign portfolio investment)
limits on government securities are both very welcome measures given the highly
uncertain and volatile global environment that exists currently,“ said Pramit Jhaveri,
chief executive officer of Citigroup India. “RBI is concerned about the impact of the
global environment on India and these measures are designed to provide an
impetus to growth in India and to cushion the economy against global volatility.“
Rajan was in accord with US Federal Reserve chair Janet Yellen on developments in
China having a deleterious effect on the global economy. He pointed out that the
“Federal Reserve has postponed policy normalisation“, a move that may have
played into his decision, as did lack of investment.
“Corporate investment has been weak,“ he said. “So these are fac tors that
suggested we could use the maximum room that the inflation forecast gave to cut
50 basis points.“
The next RBI monetary policy review is scheduled for December 1.

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(Founder and C.E.O of Saxbee Consultants & Other-Mother
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