Cut Rates, Now!

The recent fed rate cut of 75 basis points was a move by the Federal Reserve to keep the US economy from going into recession and to calm down the financial markets. In India too the need for a rate cut is increasing, day by day. The interest rate sensitive sectors like Consumer durables & the transport equipment sector have been performing below expectation & if the interest rates are not cut their performance will deteriorate further. The interest rate differential between India & US has increased even more due to the rate cut in the US. This will further attract more foreign flows. Already the RBI is struggling to manage the existing flows; Can it handle more? No way!

The cost incurred to sterilize the rupee has also been growing. The higher interest rates with increased curbs on foreign loans will increase the cost structure of Indian companies.

The question then arises, how much should the rate cut be; a 25 basis point cut would be a conservative one while a 50 basis point cut will be aggressive. RBI is unlikely to implement a cut of over 50 basis point & keeping in mind the conservative style of RBI a 25 basis point cut may be more likely if there is a rate cut.

But will RBI bite the bullet now?
We will know by tomorrow.