Time to cut Rate or not ??

The Chinese Central bank & the Government been trying hard since last  8 weeks or so to keep the Chinese stock market rout in control.  They have taken several unprecedented steps including recent move to cut its benchmark interest rates and lowering of reserve requirements for banks (25 basis points interest rate cut coupled with a 50 basis point reduction in reserve requirement)  apart from  two successive  devaluation of the yuan against the dollar.

Chinese action has  compelled  other central Banks to review  their monetary policy .The central banks of other countries, including South Korea and New Zealand, which have lowered rates in response to growth tapering off amid shrinking global demand and crashing commodity prices.

As of now  the Reserve Bank of India’s (RBI’s)  continued to maintain  a  monetary policy stance by  adopting  inflation target and    bench marking  it  to the consumer price index.  RBI has stressed to see low inflation on a sustained basis while there is  pressure  from  the government and business community  to lower interest rates to  inject more momentum in the economy and encourage investment. 

The policy maker  argue  that the stimulus to growth has to come from other quarters and not by rate cuts only. Introducing GST, labour reform are could be  examples of such other boosts.

The inflation expectations among the public are still high — leading to a gap between what savers expect in terms of returns adjusted for inflation and the rates that corporations think they ought to be paying. 

Sometime economic sense doesn’t  align this with political sense for those who have to worry about winning elections. This is possible when economic sense permeates the public discourse, so that political leaders find the courage to argue for it, even at the expense of short-term pain.