Why did RBI's Governor Raghuram Rajan cut repo rate by only 25 bps?

Why did RBI's Governor Raghuram Rajan cut repo rate by only 25 bps?

3 June 2015, 19:46
Sunder Singh
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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.

First, some forecasters, remarkably the IMD, predict a below-normal southwest monsoon. Astute food management is needed to take the edge off possible inflationary effects.

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. 
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