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Why Dr Rajan refused to oblige with another rate cut... - Views on News from Equitymaster

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  • Feb 3, 2015 - Why Dr Rajan refused to oblige with another rate cut...

Why Dr Rajan refused to oblige with another rate cut...
Feb 3, 2015

At a time when most other central banks globally are willing to print trillions, Dr Rajan certainly has a lot of peer pressure. But neither were his predecessors at the RBI bothered about popularity nor is he himself!

As we have always said, India is fortunate to have had central bankers over the past decade who never compromised on the crux of central banking. They never gave in to demands of political and corporate heavyweights. And instead did their best to highlight the risks even in times of optimism.

After the unexpected rate cut in January, policy makers, corporates and stock markets were almost certain of Dr Rajan cutting rates in quick succession over 2015. After all, why keep borrowing costs high at a time when India is probably the only feasible investment destination?

But as it clearly appears, Dr Rajan clearly thinks otherwise!

But choosing to cut the Statutory Liquidity Ratio (SLR, which mandates banks to invest some capital in government bonds) by 0.5%, the RBI has freed up some funds for banks. However, the decision to not cut the benchmark repo rate signals the governor's hesitance to join in the optimism. India's inflation problem is not behind us as policy makers would like us to believe. And the fiscal deficit problem is certainly going to remain longer than expected. In such a scenario, if the central bank loses sight of systemic risks then we would be hardly better off than the US or Eurozone.

Banks in India will certainly have it tough getting rid of high NPAs and restructured loans. The current interest rates will ensure that unlike the big banks in the US, ones here do not have an easy exit. Also corporates will continue to remain cautious about leverage.

We believe that for investors, there could be nothing better than investing in an economy where systemic risks are largely taken care of. Be it debt to GDP ratio or savings rate, India is better off than most other developed and developing economies. And there is no reason why the RBI should oblige policy makers and corporates with a rate cut, earlier than it is warranted.

Investors on their part should ignore the hype around Monetary policies and instead focus on finding undervalued stocks trading at significant discount to intrinsic values.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.

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