The markets tanked yesterday despite a 0.25% cut in rates by RBI and there has been some criticism on the same as to Rajan’s monetary policy is confusing if not confounding to the markets and that he could have remained either watchful or be more aggressive in the cuts.
He termed it the “goldilocks” policy. Both being cautious and aggressive! Whatever it means!
My view though is like this. The market sentiment cannot be judged by one day’s reaction to this. Probably it tanked due to the fact that 0.25% cut was anyways expected and factored in. And they were expecting more.
The main issue is largely the monsoon forecast which not just the RBI Governor, even the Earth Sciences Minister Dr. Harsh Vardhan yesterday confirmed that the predictions are below normal monsoon and probably due to climate change. So that has a larger effect until the actual scenario changes. While the article said he could have waited until July, the thing is IMD forecast and other forecasts are already out! So regardless of what the Governor said the markets would have reacted based on that.
Third, the Governor said was in terms of the Corporate sector not doing as expected. Hence the growth percentage being adjusted downwards to 7.6% as opposed to what Economic Advisor Arvind Subramanian indicated earlier. We need to see the fine print here. There was a recent report by Ambit and Macquarie that hinted at the PM’s crackdown on crony capitalism which could affect near term growth but necessary. A lot of corporates aren’t that happy that they are not getting the lobbying leverage as it was during UPA time. Besides the taxation (due to higher cess and ST) is going to have its effect and FDI translating to growth through Make in India would take some time.
Considering the above the market reaction was just reflecting adjustment to hypes. Leave aside any political differences between RBI and Government and other such behind the scene tussles, I would rather be still cautiously optimistic than ending up as the high growth bubble UPA 1 witnessed until 2008 that resulted in greed overtaking sustainable growth of economy.
(Image courtesy : rediff.com)