Rajan’s festival surprise for the markets

January 16, 2015 Stock Market Updates 2 min read
Rajan’s festival surprise for the markets

A surprise rate cut in festival season – so what prompted the RBI’s belated benevolence?

Surprise by Rajan for all stock broker

Online trading in financial markets were taken by surprise on Thursday as RBI made an out-of-turn policy rate cut announcement around noon (reducing the benchmark repo rate from 8% to 7.75%). Stock Market responded enthusiastically with the Nifty climbing over 2.6% and rate sensitives gaining even more:


The RBI Governor Raghuram Rajan had said earlier that a rate cut might be looked at outside the regular policy review cycle for early 2015 (the next policy review was scheduled for early February), and with this change to the repo rate, he has lived up to his word.

Whilst pressure from the political leadership, industry and consumers had been building for some time, the RBI had held out against releasing its ammunition for a fair length of time. Concerns around both inflation as well as the fiscal imbalance held policy action back. Inflation had proven endemic despite slowing growth and most recently, we heard that the fiscal deficit had already reached 99% of its full year target in the first nine months of the fiscal.

The RBI’s announcement begins with the statement ‘Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing’. This is borne out by the trend in Wholesale Price Index (WPI) inflation over the course of 2014:

Inflation IndiaData source: Ministry of Finance

So what has contributed to falling prices? To some extent, decline in prices of vegetables and fruits, lower price pressures in cereals and the large fall in international prices of industrial commodities has helped. However, by far the largest contributor to lower inflation has been the crash in crude oil prices:

Crude Oil

Data source: www.investing.com

This view on lower input prices (read, inflation) has led to the RBI being a little more sanguine about its concerns over putting more (and cheaper) money into people’s hands. For now, the RBI shares the stock markets view that in the absence of any major geo-political shock in oil markets, prices are likely to remain low and consequently, inflationary pressures are unlikely to arise through online trading. Current demand:supply equations do seem to suggest that this is a prudent view. The Governor’s statement that “these developments have provided headroom for a shift in the monetary policy stance” suggests a major shift towards an easier policy regime on both rates as well as liquidity in the near future.

In stock market, what remains to be seen is how much of existing supply is cut back at these low prices as producers shut capacity in response to persistently lower prices. The other dampener could be the government’s failure to rein in the fiscal deficit more so given the recent pessimism surrounding the ONGC and CIL divestments, which if media sources are to be believed, have been shelved.

Until then, stock markets cheer the much awaited bonanza; hopefully expectations for continued rate cuts at subsequent policy reviews will remain within rational bounds. The RBI has indeed taken “this opportunity to convey [its] best wishes to all for Makar Sankranti, Pongal and Uttarayana.”



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