RBI surprise rate cut: ‘Let the party begin’ says the God of Mint Street

Raghuram Rajan, India’s most committed inflation fighter, has sent a signal that no one can ignore. By cutting the repo rate - the rate at which the Reserve Bank lends overnight money to banks - by a quarter percent today (15 January), he has essentially signalled that inflation is dying and that growth needs a push. And when Rajan says it, it is believable, for he has been skeptical about the rumoured death of inflation despite official confirmations from data and the coroners of North Block. By cutting rates unexpectedly outside the regular monetary policy cycle, Rajan has not only lived up to his reputation for surprising the markets, but will end up galvanising activity everywhere - the stock and bond markets, corporate India, and in the corridors of power. His decision has added significance precisely because he has refused to kowtow to political pressures in the past. We can now say the rate cycle has turned down. [caption id=“attachment_2018149” align=“alignleft” width=“380”]  Let the party begin. The Sensex has got the message. AP[/caption] A falling interest rate regime is good for everybody. The bond markets will rally, even though they had already begun celebrations in advance by a few months. Debt funds will report an extra bounce in their net asset values. The stock markets will now offer better discounting on companies with good and predictable cash flows. Disinvestment prospects will improve. The government’s interest burdens will ease up - something that is needed if the fiscal deficit will now be cut more slowly in order to boost public investment. And corporate India can swap its higher cost debt with cheaper money. Banks can raise tier-2 capital more cheaply and also fresh equity to strengthen their balance-sheets. Our home and auto loan rates will ease. The only - theoretical - losers will be savers, who may find bank fixed deposit (FD) rates falling. But that would be a wrong conclusion. Savers will actually better off now. When inflation was high, they got higher nominal interest rates and lower (or negative) rates after adjusting for inflation. Today, even an 8-8.5 percent fixed deposit yields real interest rates of 3 percent. Ask yourself this simple think: are you better off with 9 percent rates and 8-10 percent inflation, or 8 percent returns with 5 percent retail inflation. The saver math is a no-brainer. Savers should latch on to higher rates when they are still available. Also grab as many tax-free bonds as possible at yield-to-maturity rates of 7 percent plus. Triple A tax-free bonds from National Housing Bank, NHAI and IRFC are already hovering around 6.9 percent YTM. Some Hudco and REC bonds are still above 7 percent. Grab them. They ain’t making any more of them no more. Stay invested in debt funds, and invest more in equity. But avoid real estate (for investment purposes, not actual use) and go easy on gold for now. The repo cut signals that even if not all’s well with the world, the Indian economy will get a healing touch from God. Says who? Well, we have it straight from the God of Mint Street, R Rajan. Who else do you need confirmations from? Let the party begin. The Sensex has got the message.