RBI repo cut: 7 years after Dow Jones crash, September brings cheerhttps://indianexpress.com/article/explained/rbi-repo-cut-7-years-after-dow-jones-crash-september-brings-cheer/

RBI repo cut: 7 years after Dow Jones crash, September brings cheer

When Rajan took over at the RBI in September 2013, the Fed made noises that it was about to reverse that accommodative monetary policy sparking a huge reversal of dollar inflow into India.

Reserve Bank of India, RBI rate cut, RBI, RBI repo rate, RBI interest rates, repo rate, rbi, rbi repo rate, reserve bank of india, repo rate cut, rbi repo rate cut, Reserve bank, Dow Jones, Lehman Brothers, Raghuram Rajan, business news, latest news,
The Frankfurt branch of the Lehman Brothers bank. (Source: reuters)

September has been a cruel month for monetary policy makers since 2008. Was that a reason behind the RBI Governor Raghuram Rajan’s decision to deliver much more than the markets expected on Tuesday?

His 50 basis points cut in the repo rate saw a 364 point salute from the market. This comes on the same day as in 2008 when the Dow Jones Industrial Average recorded its biggest ever 777.68 point fall in its history as the news came in that the US Congress had failed to clear a recap deal for Wall Street. That September had already delivered the death of Lehman Brothers and Washington Mutual with couple more including Citibank in the sick bay.

The debris from that cataclysmic month is still swirling around the financial markets of the world. It set the US Fed on a rapid course to reduce interest rates to zero. The repercussions of those actions have impacted all major economies since then including India as investors with dollars rushed here to take advantage of the higher interest rates.

When Rajan took over at the RBI in September 2013, the Fed made noises that it was about to reverse that accommodative monetary policy sparking a huge reversal of dollar inflow into India. The new governor learnt his lessons well from the episode: he set about shoring up India’s forex reserves and putting in measures to reduce the deficit India ran with the rest of the world.

In September this year when Fed Governor Janet Yellen seemed finally ready to raise rates in USA for the first time since 2008, the Indian economy was prepared to handle the crisis. This was a first of sorts for India, whose economic history for decades has been one of being buffeted by adverse movements on global currency and commodity markets. The Fed postponed its decision but as Rajan has said Indian policy-makers are not agonizing over the decision about when it will come every day.

Remember that China has, meanwhile, added another domino on the table for central bankers to contend with.

Advertising

The ‘persistently low inflation’ that India has entered into, an unusually benign circumstance for this economy and the bulwarks the RBI has created over the past two years have together allowed Rajan to offer at least one piece of good news in this month of traditional mayhem in the global financial markets. That it is timed with the Dow Jones meltdown is a good reason to cheer a bit more.