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Why no rate cuts?

Everybody expected a rate cut, given the dismal GDP growth in the September quarter. All argued a rate cut would not be of much use but had little faith in the MPC’s intestinal fortitude for straying from the beaten track. And they were proven wrong as the RBI decided to not reduce interest rates. It was very astonishing it did so in spite of slashing its GDP estimate for the current fiscal year to 5%, the slowest growth since the Lehman crisis.

This puts the focus back on inflation. We must see the onion price spike reverse and also hope other food items don’s see sharp spikes in prices. We also need to see oil price contained at reasonable levels. The economy needs to manage inflation well in the coming months and ensure that we have scope for a rate cut in February when the RBI meets after the budget is presented.

Between now and February, a lot of things will be set on course. FIIs will decide their EM strategy and within that their India stance. The last three months saw continuous net inflows from FIIs. November was particularly positive with the year’s best inflows of 3.2 BN dollars. With the growth forecast significantly downgraded, the FII flows in December are very crucial.

What people also want to know is: how near are we to the end of the rate cycle? Well, the RBI feels growth is going to bounce back to between 5.9 and 6.3% in the first half of FY2021. Why then the need for more rate cuts? People are catching on that rate cuts may not work, which is why the clamour for a TARP (Troubled Asset Relief Programme)---taking stressed assets off NBFC books on the lines of what was done for banks in the US after the financial crisis--- or some form of Quantitative Easing is growing.

The markets show few signs that the Indian economy is anywhere near a Lehman moment. They continue to take setbacks in their stride and hover near their all-time highs. Perhaps they are taking heart from the November Purchasing Managers Index that a bottom has been reached, although their faith in a quick recovery does call for a willing suspension of disbelief. Or they may be reading a Bloomberg report that says liquidity will remain strong next year, as the three largest central banks continue to expand their balance sheets.

Source: Moneycontrol & Mint

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