Apropos the editorial, "Dovish tone"(April 6), the Reserve Bank of India's (RBI) rate cut by 25 basis points was obvious. The market seems to have anticipated the rate cut, hence reactions were subdued, though it is believed that an additional cut by 25 basis points would have brought more cheer.
With the government adhering to fiscal consolidation, a cut in small savings rate and banks shifting to lending rates based on marginal cost of funds April 1 onwards, the general feeling was there was room for the central bank to cut key policy rates by at least 50 basis points.
But RBI Governor Raghuram Rajan had a different view. He was concerned about the transmission of monetary policy action by banks. A closer look at the policy review shows that the focus has shifted to liquidity management. This will create a more enabling environment for better transmission of monetary policy by banks. The RBI will thus get more time to consolidate the gains and take more assertive action to sustain high growth aligned with inflation while maintaining a check on other related critical issues.
In an increasingly globalised environment, external factors, too, can never be discounted, as they have the potentials to impact the local economic environment. Although India as an emerging market economy is better placed to deal with the situation, yet the turbulence experienced in some pockets across the world has led to concern.
The appropriate transmission of monetary policy action by banks will be keenly monitored. Improved macroeconomic conditions coupled with supplementary efforts from the government should provide the RBI more space to cut interest rates further.
Rajan seems to be guided by the proverb, "slow and steady wins the race". Nonetheless, the larger view is that India needs a higher rate cut to maintain growth. Rajan is aware of it. It's just a matter of time before he takes the plunge.
Srinivasan Umashankar Nagpur
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