Sensex down 400 points as RBI cuts rates by just 25 basis points
Sensex tanked 400 points today as the Reserve Bank of India governor Raghuram Rajan widely disappointed markets and analysts by cutting repo rate by just 25 basis points to 7.25%. Clearly investors are not happy with Rajan's cautious stance on further easing.
So why did the RBI cut repo rate by just 25 basis points? Rajan sees three risk scenarios that could cloud the picture:
First, some forecasters, notably the IMD, predict a below-normal southwest monsoon. Astute food management is needed to mitigate possible inflationary effects.
crude prices have been firming amidst considerable volatility, and geo-political risks are ever present.
Third, volatility in the external environment could impact inflation.
Rajan says a conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak. "With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty.
At 11:56 am, the Sensex was down 354 points at 27494, while the Nifty was down 107 points at 8327.
Given Rajan's conservative approach, economists do not expect another rate cut till December 2015. Little wonder that the markets are tumbling despite today's rate cut.While the cut was factored in by the markets but the central bank's cautious stance on further easing is hurting sentiment
“The RBI delivered as per market expectations by cutting the repo rate by 25 bps and bringing the rate easing cycle to a pause for the time being. The central bank has advised caution while outlining the three major risks to inflation in the form of sub-par monsoons, oil prices moving up and a volatile external environment that are likely to guide on the quantum of rate cuts in the future. Importantly, the RBI now sees upside risks to its January forecast of 6% inflation and ha also brought down its growth estimate. This shows that the RBI expects a gradual recovery, which would in part be dependent on how the monsoons pan out. Overall, we see this as a prudent monetary policy with future easing contingent on how the data shapes up," says Anis Chakravarty, Senior Director, Deloitte in India.