The policy action by the Reserve Bank of India signals its desperate bid not to let go perhaps “the last window of regulatory opportunity’’ ahead of a tough season.
Economists are of the view that the RBI has rightly sensed its chance to do its best to nudge banks to do a follow-on act and cut rates.
And this is why it has pegged down repo rates at which it lends to banks by 50 per cent, which was way beyond expectations.
It has also sought to bring liquidity to within the comfort zone, encouraging banks to “deliver’’ in a spirit of “accommodation’’.
Most economists find it difficult to digest this “dovish’’ approach, after a much harsher review of the macro-economy only the previous day.
A comfortable liquidity position and significant improvement in non-food manufacturing inflation may have encouraged the RBI to do what it did this morning.
But the massive government borrowing expected to begin soon and tweaking of administered price regime could prove it wrong in the next few months.
The borrowings could crowd out the private sector, push up bond yields and nudge up interest rates, economists aver.
Effectively, the RBI had only this quarter to allow itself some headroom and be seen as doing its best to perk up the investment cycle.
This is clear even from the RBI’s own admission that it would have less freedom going forward to act in an accommodative manner, however might it wishes to.