I have been tied up a bit - but this rate cut by RBI is very very intriguing. By clearly signaling that they want to keep the window of rate cuts only for the next crisis only a few days ago, the RBI has done an about turn and cut key rates. The cuts are even more baffling considering the comfortable liquidity position of the system and by now it has become pretty clear that interest rate cuts will not lead to increase in lending by banks.
In terms of monetary actions there is nothing that this cut would do unless there is expectation that govt. borrowing would suck out all liquidity from the market. Or more likely is the this a politically forced bailout to stimulate the now dead real estate market.
None of the commentators I have read have called for a rate cut. What is going to happen?
1) A large scale govt. borrowing program
2) Calls for banks to reduce lending rates (whether they lend or not is a different matter). Having recently seen the benefits of the PM s scheme to build local roads I am convinced you are better off putting money into people s hands that way.
3) Rupee under further downward pressure.