Everybody is trying to take clue of what our RBI governor
might do in its monetary-policy-review tomorrow. It makes sense that since we
do not have latest inflation figure and the data reference is still old Rajan
must wait for more data. But, the governor last two times surprised all with off-date
rate cuts and there is a little chance this time too he might leave all in awe.
Rajan has a tendency for surprising his observers, but no doubt he can maintain
a status-quo and wait for latest data. The central-banks job is not so much about
manipulating interest-rates directly, it is about managing money-supply and the
interest-rate adjusts accordingly. Long-term rates guide short-run changes in interest-rates
on retail-loans. The repo-rate too changes money-supply to commercial banks and
is not the sole determinant of interest-rates... In short, it is the money-supply
which affects interest-rates in an economy and if there an increase in
money-supply interest-rates will fall... Keeping this mechanism in focus the
central-bank may reduce reserves requirements and liquidity-ratios to increase
money-supply and reduce interest-rates on credit... But, the transmission of
money-supply to low interest- rate takes six months or more to translate in to
higher investment therefore we can expect growth to pick only after the lag... As
far as inflation is concerned it is expected to remain low on account of low
global commodity prices. This time again Rajan might surprise us with repo-cut...
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