RBI Cuts REPO rate from 8% to 9%

As I was insisting from last one month or so in my previous posts, RBI reduced the repo rate by 100 basis points that is from 9% to 8% with the immediate effect. This is the first repo cut since 2004.

In a statement issued on Monday, the Reserve Bank of India said that it 'has been continuously monitoring the monetary and liquidity conditions with a view to maintaining domestic macroeconomic and financial stability in the context of the global financial crisis.'

The global financial situation continues to be uncertain and unsettled. Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting also to countries outside the epicenter of the crisis,' said the RBI statement.

'India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks. The Reserve Bank has been and will continue to monitor the impact of global developments on our financial markets and on our liquidity conditions and will take action as appropriate,' the statement added.

The Finance Minister, P Chidambaram said that the repo rate cut will help in moderating inflation. This is a positive move which will enthuse both borrowers and investors, the FM added. The RBI’s move is consistent with the government's aim of maintaining high growth, he added.

My View:

I was expecting gradual decrease in the REPO rate in terms of 50 basis points as RBI need to take care of INFLATION also. Since inflation just now only started reducing mainly because crude oil price decrease, global fear of recession, cost cutting majors of majority of the companies and base effect.

This move was above expectation and mainly aimed for boosting the investor sentiments. So Central government need to take care supply side of the economy. Since once the liquidity starts the economy in that proportion demand increases for various goods and services.

And central bank needs take care of country’s fiscal deficit so that it can take care of currency depreciation. Since INR depreciated from almost 39/$ in last October to 49/$ this October many oil companies and country not able to get the benefit of Crude oil price reduction.

And as for as SEBI is concerned I already mentioned they need to ban short selling at least for temporary movement since dust is not yet settled down and as par the experts views normal bear phase in the history lasted for nearly 18 months. So to minimise the panic in the investors SEBI needs to think of this option.


Source...
Rediffmail.com
Moneycontrol.com