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Rate cut fails to lift mood

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Mumbai :  In a double whammy, the benchmark BSE Sensex on Tuesday plunged by 661 points, its biggest fall in nearly a month, and rupee went down by 11 paise as RBI sounded a note of caution on economic recovery, while forecast of a deficient monsoon added to the rout.

To begin with, the miniscule cut in the policy rate — by 0.25 per cent for the third time this year — announced by the RBI did not cheer the markets. To further dampen the sentiment, the RBI indicated that there may not be any more cuts in the near-term, which sent the stock markets in a tizzy.

RBI Governor Raghuram Rajan also told a news conference that there were factors to suggest that growth was weaker than the headline numbers made out. “In general, the corporate results have been quite weak suggesting that final demand is yet to pick up strongly.” The RBI, in fact, has lowered its economic growth forecast for 2015-16 to 7.6 per cent, from 7.8 per cent earlier.


Incidentally, everyone, including Arvind Subramaniam, the chief economic adviser, wanted Rajan to be aggressive and take advantage of subdued inflation to give more support to an economy that many economists doubt is doing as well as the latest growth numbers suggest.

Rate cut apart, Rajan suggested to the government to prepare ‘contingency plans’ to deal with the impact of deficient monsoon on food prices. Hours later, the India Meteorological Department said the monsoon is likely to be only 88 per cent of the normal average or “deficient”, triggering fears of drought and adding further uncertainty in the market.

Rajan also said inflation still remains a worry for the central bank as it expects price rise to remain subdued till August before rising to 6 per cent by January 2016.

India Inc welcomed the rate cut but said it is still not enough to spur demand and propel industrial growth. “At least 50 basis points cut in the repo rate was required along with a reduction in the Cash Reserve Ratio so that banks are able to reduce their cost of funds,” Assocham President Rana Kapoor said.

EMIs head South

EMIs on home and auto loans will come down with the SBI and other banks cutting lending rates within hours of the RBI slashing policy rate by 0.25 per cent for the third time this year. The country’s largest lender, the SBI, has reduced the lending rate by 0.15 per cent to 9.7 per cent, while Allahabad Bank and Punjab & Sind Bank cut their base rates by 0.3 per cent and 0.25 per cent, respectively. Others are likely to follow suit.

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