That on June 2, when RBI Governor Raghuram Rajan unveils his next installment of monetary policy, there will be a rate cut is now a given. We have no doubt whatsoever that it is coming because it is long overdue. And the central bank cannot be unseeing what everyone else, including seasoned economists, see are objective economic conditions for such a cut. From Finance Minister Arun Jaitley to his Chief Economic Adviser Arvind Subramanian, a host of economic pundits have explicitly stated that the conditions are ripe for a rate cut. The key point warranting such a cut is that as per the criterion set by none other than Rajan himself a cut in the prime lending rate is due. The target rate of inflation that the RBI Governor had set for this time of the year was six percent. Well, consumer price inflation now is below five percent while wholesale inflation is less than three percent. Both fiscal and current account deficits are well under control. Ideal time, then, for a salutary rate cut which might revive, as some are prone to say, the animal spirits of Indian investors and entrepreneurs. In fact, Subramanian has called for an aggressive rate cut so that the impact can be felt immediately and strongly. Thus far in the year, Rajan has already administered two reductions in the PLR but in tiny, homeopathic doses. This time around a mere 25-basis point cut would only disappoint both investors and economic policy-makers. As Subramanian publicly demanded the other day, Rajan has to be aggressive in cutting the rate. A hundred basis point cut would meet the expectations of the markets. But is that on the cards? Well, we will be pleasantly surprised if Rajan took this bull by the horns and gave the movers and shakers of the economy both in the private and public spheres something really to chew over and act upon. Given the painfully slow capital formation, given the less than enthusiastic performance of the economy even after a full year of Modi as prime minister, given the fortuitous dip in both crude and commodity prices in the global markets, the corporate sector has produced a rather poor report-card in the last two quarters. Yes, it was amiss in clogging its balance-sheets with huge quantities of unserviceable debt. Yes, it is saddled with huge inventories and unproductive capacities. But, the present cannot be allowed to be a prisoner of the past greed and other such mistakes. The Modi Government is keen for the private sector to do its bit for boosting growth to a decent eight percent rate. The `Make in India’ programme hinges crucially on a dynamic private industrial sector. Without the manufacturing sector regaining momentum, new jobs — even a small portion of the over a million of them required every month — are hard to imagine.
In fact, the sentiment on the share markets too has turned rather indifferent in recent weeks as the foreign institutional investors turned net sellers last month. New issues in the primary market have virtually dried up. Remember, a rate cut also benefits middle class and even the poor who must borrow from banks to pay for new homes, new bikes and cars and/or service old mortgages. Last time when Rajan cut the rate in two small doses of 25 basis points each most of the banks were reluctant to pass on the benefit to the borrowers, given that their balance-sheets are spluttered with red ink, particularly those of the public sector banks. A substantial cut of one percent will result in a tangible gain for the far more numerous middle and lower middle class as well. Rajan should bite the bullet and surprise the markets — pleasantly, of course, by announcing a hundred basis point cut. And then expect the economy to do the rest.
