The Reserve Bank governor, D. Subbarao has slashed the repo rate-the rate at which banks borrow from the RBI-by 50 basis points to 8%. It has taken the market by surprise, being the first repo rate cut since April 2009. It is the best step the RBI could take to combat inflation and incentivise growth. Thirteen rate hikes between March 2010 and October 2011 decelerated the economy. The growth rate in the third quarter of 2010-11 dropped below the post crisis trend rate to a two-year low of 6.1%. The RBI has taken stock of the inflation, especially inflation in the non-food manufactured kind. It dropped in the past four-months to 4.7% in March. The time had come for a strong signal to corporate bodies to invest and generate employment. Subbarao should be complimented for doubling the repo rate cut from the expected 25 basis points. It shows his confidence in this year’s budget which aims at controlling expenditure to curtail fiscal deficit. The RBI’s projections indicate that inflation based on the wholesale price index will again touch double digits in September. It therefore explains the urgency in making the repo rate cut.
Finance Minister Pranab Mukherjee now has to create greater scope for the RBI to repeat its act. The allies in the UPA have to be persuaded to see the need for a gradual deregulation of the prices of petroleum products, especially diesel. Crude prices are now around $ 120 per barrel. It will, under the present regime, add to the burden of government subsidies to the oil sector. Everything depends on how the situation pans out at the end of the budget session of parliament. The cut in the repo rate will not by itself stimulate investment.