Tad bit of mystery around Wednesday's repo rate cut

NOMURA said that while it did see a case for a repo rate cut, "the rationale laid out by the RBI for the inter-meeting cut is very weak, and may lie outside the economic domain

Discounting the prescient few in the market, the Reserve Bank of India's Wednesday repo rate cut was a surprise to say the least. However, the feeling of surprise had transformed into one of curiosity for some by the time the dust had settled.

Usually, it is an interest rate hike, particularly a surprise one, that results in some sort of dissatisfaction. But, there were some market observers who were not completely convinced by the RBI's move, or the reasons cited by the central bank.

In a report, Nomura Securities said that while it did see a case for a repo rate cut on account of the continued moderation in Consumer Price Index inflation, "the rationale laid out by the RBI for the inter-meeting cut is very weak, and may lie outside the economic domain and could be in return for the government approving the monetary policy framework recommended by RBI". A less conspiratorial explanation was forthcoming from other avenues, with the RBI seen as 'rewarding' the government for its 2015-16 (Apr-Mar) Union Budget. The RBI had previously cited high quality fiscal consolidation as being key to further monetary easing.

Although the government's decision to stretch the fiscal consolidation roadmap by another year was not received with a resounding cheer, there was a general acceptance that the Budget math was more realistic than that seen in previous budgets.

This was echoed by Governor Raghuram Rajan not only in his statement on Wednesday morning, but again in a hurriedly-arranged teleconference with researchers and analysts, albeit in a more measured manner at the latter. Rajan said the Budget was a good place to start at, and was something the RBI could "work with".

If one has the liberty to be slightly cynical, there could be two other explanations for Wednesday's rate cut. One, a status-quo from the RBI would have given the impression that the central bank was not too impressed from the Budget, having given indications that it would wait for the government's fiscal consolidation plans before taking a further call on monetary easing. As such, a 25-basis-point rate cut was effected. And while it can be argued that RBI would never cut the policy rate purely to save the government's face, it is worth noting that many had expected a more sizable rate cut than the 25 bps one it announced on Jan 15 after the RBI got a sense of what the inflation trajectory was after the dissipation of the favourable base effect. Or maybe RBI had set the bar really low for the Budget. -Cogencis