Rajan cuts repo-rate...

Raghuram Rajan, our RBI Governor, keeps-up with his surprise element in the decision making process. Rajan said he is expecting inflation to remain benign, close to 5.8% in the September, even without the favourable base- year effect, lower than the target (6%) set by the government and the RBI... Nonetheless, the government’s commitment to stick to fiscal-deficit target would keep inflation low giving more room to easing... Low global commodity prices have given Rajan confidence of lower domestic and imported inflation... Lower crude-oil prices would keep the current account deficit in check by lowering demand for foreign-exchange and inflation... However, rate cut might increase depreciation and export-competitiveness in an adverse demand situation globally which the governor tried to supplement with increase in domestic demand when he cut-rates... Lower global and domestic demand has probably made Rajan to try to increase both... Interest- rate movements do affect exchange rates, too...  Exports have also tumbled recently... Lower growth projections in a subdued global scenario resulted in a near aggressive rate-cut by the RBI... Rajan has cut double than the expectations... According to the Taylor-Rule a 50 basis points cut in rate by the central-bank may increase growth by 1% which could improve ahead... INDIA is in a rate-cut cycle but that would continue to depend upon inflation... Rate-cut cycle ends when inflation starts growing more than wages, and, hurt demand and growth... If both inflation and wage increase equally then its effect on demand will be negligible... Growth depends upon demand and supply which are interdependent and should be incentivized to gain more growth with price-stability... Both, price-stability and full-employment is important for domestic- demand because price-stability affects the value of money and therefore demand, and, full-employment signifies that everybody is employed and has an income... Price-stability lowers demand for wages and interest-rates hike which also help to contain cost and price, and ultimately demand, domestic and external... Lower-prices are imminent for economic-expansion and growth; otherwise it will increase cost and price, and, hurt competitiveness... Lower interest-rate today could reduce prices by lowering capital-cost and increasing supply...