Here’s how RBI’s Raghuram Rajan managed to save the economy with his 50 basis point cut!

The Reserve Bank of India (RBI) governor Raghuram Rajan pleasantly surprised the country when he announced a rate cut by a whopping 50 basis points as against the expected 25 basis points. And while we are all cheering about cheaper home loans, here’s how he bailed out the economy amidst global headwinds.

According to the latest statistics, the WPI (wholesale price index) inflation has further gone down to -4.95% in August from -4.05% in July while the CPI (Consumer Price Index) inflation has dipped to 3.66% to 3.69% in the same period. While a dip in inflation is great news for the economy, however, a significant decline could lead the economy to deflationary territory, which many economists have feared off late.

One must remember that in a deflationary economy, while the prices of goods will come down, it will eventually severely hurt the industries, thus starting a vicious cycle of de-growth in the economy.

However, Rajan has salvaged the situation. He has lowered the interest rates, at which the apex bank lends the rest of the banks, by 0.5%. Thankfully, the US Federal Reserve too has postponed their policy nominalization.

“…Since then, inflation has dropped to a nine-month low, as projected. Despite the monsoon deficiency and its uneven spatial and temporal distribution, food inflation pressures have been contained by resolute actions by the government to manage supply. The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June,” said Rajan in his statement.

And there are no prizes for guessing that this would positively impact our retail loans. The RBI too has once again asserted the need for banks to pass the benefits to the consumers especially in the retail loans. Industry experts expect the banks to largely take a decision to lower the interest rates in the next 48 hours. Reports have suggested that the State Bank of India has slashed the interest rates by 40 basis points.