Raghuram Rajan Comes Under Fire for Surprise Rate Cut

Reserve Bank Governor Raghuram Rajan has often been praised for his deft handling of the chronic inflation problem that troubled India's economy for years. Retail inflation is now firmly under control, giving the central bank the elbow room to cut rates.

However, Dr Rajan's second successive inter-policy rate cut, announced on Wednesday, doesn't seem to have gone down well with many analysts.

Hong Kong-based CLSA's economist Rajiv Malik told NDTV, "This is odd for a central bank, which is not facing any economic or existential crisis in the economy to have two back-to-back inter-meeting rate cuts."

Pranjul Bhaduri, Chief India Economist of HSBC Securities and Capital, said she was surprised that the rate cut came "so soon" after the government signed up for a slower fiscal consolidation path in Budget.

In his first full-year Budget on Saturday, Finance Minister Arun Jaitley delayed the medium-term fiscal deficit target of 3 per cent of GDP by one year to 2017-18.

"The commentary on future inflation projections seemed cautious on balance... Discussion on fiscal stance also had a similar mixed flavor," Ms Bhaduri said, referring to Dr Rajan's Wednesday statement which justified a rate cut on easing inflation and the government's fiscal consolidation programme.

Markets jumped on RBI's surprise rate cut with the BSE Sensex surging over 400 points to a record high above 30,000 in morning trade, but some analysts were not impressed. Abheek Barua, chief economist of HDFC Bank, said surprise rate cuts may not be good for markets in the long term.

"I don't think it is necessarily a good thing. It introduces a lot more volatility in the markets, than when the rate cuts were coming on a formal platform...I think that's something I would warn against," he said.

There could be a situation where there is positive data, and Dr Rajan doesn't follow up with an immediate cut, Mr Barua said.

"The market might sell off. So you're sort of building a lot of expectation around a very reactive policy, which I don't think is a good thing," he added.

Noted economist Ajit Ranade suggested that Dr Rajan was contradicting himself. "Incidentally this was headline 24 hrs ago. "can't cut rates, inflation high" surprise #ratecut!," he tweeted.

The most surprising reaction, however, came from Sumant Sinha, who heads renewable energy firm ReNew Power and is the brother of Minister of State for Finance Jayant Sinha.

"Surprise for the sake of surprise - #RBI rate cut!" Mr Sinha tweeted.

   (With inputs from Reuters)