The (RBI)
governor Raghuram Rajan broadly disappointed markets and analysts by cutting repo
rate by just 25 basis points to 7.25%. Most analysts termed the rate cut a
non-event, with the broader consensus being that 50 basis points cut were
warranted.
"Banks
have started fleeting through some of the past rate cuts into their lending
rates, headline inflation has evolved along the expected path, the impact of
unseasonal rains has been moderate so far, administered price increases remain quiet,
and the timing of normalization of US monetary policy seems to have been pressed
back. With little domestic capacity utilization, still mixed indicators of
recovery, and subdued investment and credit expansion, there is a case for a
cut in the policy rate today," the central bank said.
Why did
the RBI cut repo rate by just 25 basis points? On its part, the
central bank sees upside risks to inflation due to improbability on the monsoon
front. "Of the risks to inflation acknowledged in April, three still cloud
the picture," the bank said.
Second, crude prices have been firming amidst significant volatility, and geo-political risks are ever there.
Third, volatility in the external environment could bang inflation.