Published On: Tue, Sep 29th, 2015

RBI announces much awaited rate cut

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The RBI cut its policy interest rate to a 4-1/2-year low of 6.75 percent on Tuesday, in a move that, with inflation running at record lows, could help an economy in danger of slowing down.

Only one out of 51 economists and analysts polled by Reuters last week expected a 50 basis point cut while 45 expected the RBI to cut the repo rate by 25 basis points. The RBI has already eased the policy rate by 75 bps so far this year.

“My name is Raghuram Rajan and I do what I do”

The deeper-than-expected rate cut–most people expected a 0.25 percentage point snip–is in stark contrast to Rajan’s past reluctance to cut rates as fast as his political masters wanted. His principle had been: Tame inflation, growth can wait. This had evoked unusually caustic comments from those in government, who had not hesitated to hit out at Rajan’s hawkish stance.
His decision on Tuesday to “front-load” or hasten rate cuts appears to be based on a few basic premises. For one, there RBI now believes that it has been able to firmly bottle up the inflation genie. The mantra seems to be: inflation is under control, it is time to goad households to spend and companies to invest.

The Pay Commission will recommend higher salaries for nearly 10 million central-government employees, including pensioners. It is expected to submit its reports in the next few months, and the new payouts will likely take effect from January 1, 2016.
The last salary revision, a decade earlier, saw pay cheques rise by an average 21%, costing the government an extra Rs 17,000 crore annually. The employees had also got one-off arrear payments of about Rs 27,000 crore, driving up spending on assets, from cars to property.

The RBI will work with the government to ensure that the benefits of a rate cut is passed on by commercial banks through reductions in their lending rates, RBI Governor Raghuram Rajan said.

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