AA Edit | RBI is right to be cautious

A cautious Monetary Policy Committee (MPC) has once again decided to keep the repo rate unchanged at 6.5 per cent in view of global uncertainty and moderately high inflation. With the projection of a decently high economic growth rate of seven per cent, RBI’s focus remains squarely on bringing down inflation to its target of four per cent.

The decision is a dampener for borrowers and investors, who were looking for slashing interest rates to provide them a relief. The equity markets reacted to the decision of the six-member MPC quite aggressively — with the Sensex losing 723 points and the Nifty losing 212 points.

Though most economists did not expect the MPC to change its stance of monetary withdrawal, a cut in interest rates could have given some cheer to the middle classes. Five out of the six MPC members, however, appear to have voted to hold rates. One member pushed for changing the stance to neutral with a 25 basis point cut in repo rate.

Apart from geopolitical issues, the crucial Lok Sabha elections, which are scheduled in the next two months, appears to have influenced the MPC’s decision. While low-interest rate driven economic growth could be a great story to tell for the government, it takes time to percolate to the masses. Inflation, however, transmits to people fast and affects the poor sections of the society the most. The MPC’s decision is, therefore, a sensible one.

If the geopolitical situation does not worsen, a rate cut, however, is likely in the April or June policy meeting. The rate cut in April could create a feel-good image of the economy in the middle of the Lok Sabha elections, potentially benefiting the ruling party. If the rate cut does not happen in April, the MPC could give a push to economic growth in June ahead of the Union Budget. So borrowers may hear good news soon.