The much-awaited achhe din may be finally materialising. The surprise rate cut by Reserve Bank of India governor Raghuram Rajan will provide a much-needed — and, many will say considerably delayed — boost to the economy and the common man.
In the immediate term, a cut in the repo rate will lead to slightly lower equated monthly installments on your home and car loans, lowering the monthly outgo both for existing as well as prospective home and auto buyers. Lower borrowing costs, coupled with loan-fuelled consumer demand, will also encourage industry to move slowly into investment mode, creating new jobs, increasing overall demand and raising prosperity levels and lead to a virtual cycle of consumption-led growth.
A 25 basis points cut in the repo rate may be too small to lead to a massive recovery. Here, Rajan’s prognosis for the medium term holds out hope. In a statement released on the RBI website, he has said he expects the reduced levels of inflation, which have fallen to near zero levels at the wholesale level and 5% at the retail level, to hold because of a favourable conjunction of lower global oil prices, a decline in food and vegetable prices and some other domestic and global factors. “…the government has reiterated its commitment to adhering to its fiscal deficit target,” the statement said. This means he expects the government to maintain macro-economic stability, which is critical for keeping the inflation rate below the RBI target of 8% by January 2015.
More significantly, he added that “the fifth bi-monthly monetary policy statement also stated that once the monetary policy stance shifts, subsequent policy actions will be consistent with this stance. Key to further easing are data that confirm continuing disinflationary pressures.” Analysts are interpreting this to mean that further rate cuts, of 50-75 basis points, may be on their way after the Union Budget due next month.
If that were to happen — and along with government-led reforms measures such as the Goods & Services Tax, higher foreign direct investment limits in the insurance and pension sectors and improved power generation following the auction of coal blocks — GDP growth rates could jump over the next two years by as much as 1.5-2.0 percentage points. At that rate, millions of new jobs are expected to be created for the 12-15 million youth who join India’s workforce every year as well as mid-career professionals who want to switch jobs. And the additional demand will keep the wheels of industry rolling smoothly. Thursday’s rate cut could just be the first act of that feel good script.