Free Press Journal

‘Rate cut doesn’t change sovereign credit profile overnight’


Mumbai: International rating agency Fitch today said that 25 basis point repo rate cut may not result in an improvement in sovereign credit profile in the short run.

Reserve Bank Governor Raghuram Rajan today lowered the repo rate by a token 0.25 per cent to 7.75 per cent two weeks ahead of the scheduled monetary policy on February 3.

The central bank’s decision came after data pointed to a stable inflationary regime and some pick-up in economic activity.

“The 25 basis points rate cut does not change the sovereign credit profile overnight,” Fitch Ratings director for sovereign ratings Thomas Rookmaaker said in a note.

“From a rating perspective, what matters is whether a credible low inflation environment will be created in the country. Both the RBI and the government have taken measures in that regard,” he said.

The fiscal position is a long-standing key weakness in the country’s sovereign credit profile and, hence, fiscal consolidation that would bring down the high public debt burden would improve the sovereign credit profile, he said.

“It will be interesting to see if the budget will include a clear and credible strategy to improve the fiscal position,” he said, adding though the timing of today’s rate cut has come as a surprise.

“The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the RBI’s bi-monthly monetary policy statements,” the RBI said in a release.

The RBI has set its glide path for CPI to 6 per cent by January 2016.

The apex bank further said that weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December.

The government has reiterated its commitment to adhering to its fiscal deficit target, it said.

“These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects,” RBI said.

Rookmaaker said the RBI Governor Rajan seems confident that the inflation glide path is not compromised by this rate cut because of the current low levels of inflation, given fallen commodity and food prices as well as a gradual decline in inflation expectations.

“This government also clearly focuses on inflation with some concrete measures taken, most prominently the limited rise in the minimum support prices for agricultural products,” he added.

Meanwhile, Moody’s said, “although the timing was a surprise, a shift in monetary policy stance was not, given the recent data on inflation and growth.”