11 July 2020

Editor's Space

Late Cut


Playing a Late Cut in cricket is very strategic but requires the batsman to read the ball well, which very few cricketers are adept at, and if you play it well you could hit a boundary. Likewise RBI Governor Urjit Patel waited till the last moment -- as long as he could -- before cutting the key interest rate by a quarter point to 6 per cent, early August. However Urjit’s late cut has failed to galvanize the economy, but his saving grace is inflation is projected to remain stable in the next few Quarters.


The decision by the RBI’s Monetary Policy Committee (MPC), by a 4-2 vote, to cut the repo rate by 25 basis points — while maintaining a neutral policy stance — was expected after inflation fell to a five-year low of 1.25 per cent in the 12 months to June, which opened some space for a rate cut. It would be difficult to blame the Central Banker for delaying the cut in interest rates. Inflation remains tricky to handle and currently it is difficult to sift out other extraneous factors like demonetization to conclude if the actual inflation (which was below RBI projections) was structural or just a passing phase. For a Central Banker, keeping inflation under control is a first priority over all other imperatives, because curbing it is the sole responsibility of the Governor. The RBI governor expressed concern that CPI inflation might inch up to 4 per cent by Q4, so he wants enough room then to cut the rate again when CPI inflation undershoots their estimates, which has been the case in the recent past.


A neutral Central Bank will always keep interest rate differentials in favor of the economy to whet FDI appetite, but one needs to differentiate between liquidity management and actual inflation. Governor Urjit Patel was right in playing the late cut and maintaining his anti inflationary stance, because he needs to keep a few aces at hand to galvanize the economy in case it is slowed down again by inflationary pressures.

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