Unchanged Rate Of Interest May Dampen Investors Mood

Amid all the speculations and talks about rate cut by the apex bank, RBI refrained from taking any such step during its policy announcement on December 7. While the decision might have dampened the mood of retail investors further in these days of postdemonetisation, Bhagyashree Vivarekar explains the road ahead and what are the sectors going to be impacted following ‘no rate cut’ policy of the central bank.

- Bhagyashree Vivarekar

Urjit Patel was nervous and not comfortable in the afternoon hours of December 7 facing tough media questions from a bundle of journalists gathered at the headquarters of country’s apex bank in Mumbai. Patel, considered to be a hand-picked man of none other than India’s Prime Minister, Narendra Modi did not go for a rate cut contrary to the wide speculations on Dalal Street since last fortnight about a possible rate cut by at least 25 bps. Some had even gone one step forward and talked about a possible 50 bps cut. Sharp at 2.30pm when Patel armed with his deputies announced ‘no change’ in present interest regime, Sensex witnessed a quick free fall by over 250 points only to regain half of it later. A strong sense of criticism immediately followed Patel on social media and online media. A rate cut was needed considering banks are sitting on flush of funds, most of the critics claimed. But Patel must be having his own set of logic and so are other members of the MPC.

The rate cut was called for; many events simultaneously forced its happening. With demonetisation, 86 per cent of currency circulation was frozen resulting in liquidity crunch in the economy. Post event, international rating agencies downgraded the Gross Value Added (GVA) 2016-17 to 6.9 per cent from prior 7.4 per cent. Meanwhile, RBI also revised its target for GVA of the country to 7.1 per cent from earlier 7.6 per cent. At the global front, the expected interest rate hike by FED and weakening of rupee provoked the happening. At market level, Bond benchmark yield dropped to 6.11 per cent from the prior level of 6.8 per cent, with sell-off G-secs by FIIs. Obviously, Indian equity markets witnessed a fall of approximately 5.4 per cent in the whole scenario.