We were not surprised with the poll results when we asked readers if they agree with Ajit Dayal's or Vivek Kaul's views on RBI's 1% rate cut. Almost 56% of the respondents went with Vivek's view that such a sharp cut is not warranted.
The RBI governor stuck to a minimal 0.25% cut in the repo rate in the Monetary Policy review today. Despite all the noise about low inflation and slowing capex, the RBI's policy move reaffirms our view about the central bank's concerns on falling savings rate.
No doubt, we live in a world that favours borrowers over savers. Most central bankers across the global economy measure their success in terms of the liquidity they have added to the system. Most governments run on credit. So it is quite natural for most investors outside India to assume that they are investing in an abnormal world.
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With corporate borrowing rates in India still in double digits, the 0.25% cut is insufficient to boost earnings. As Ajit Dayal pointed out, a sharp rate cut could be a big boost to the earnings growth potential of Indian companies in the coming years. Thus further rate cuts in 2016 are not impossible.
However, if the real interest rates (rates adjusted for inflation) are to become negative, it would put the bank depositor in a crisis of sorts. And we may see households hoarding cash without investing or spending. Certainly not good symptoms for an economy aiming to grow at one of the fastest rates in the world.
The RBI's action seems to suggest that unlike its peers it is in no mood to penalize savers for the sake of borrowers. The cumulative cut to the benchmark repo rate has been about 1.5% since the start of 2015. The rate itself is currently at its lowest level in the last six years. It is unlikely that the RBI will drop rates any further until the inflation rate drops below 5%, so that real interest rates stay firmly in the positive. A good monsoon could certainly help the RBI do that.
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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