Blind-Sided By A Rate Cut

In the frenzied build-up to the Reserve Bank’s mid-quarter policy review on July 31 and the drumming up of expectations about a rate cut, everybody took their eyes off the other niggling problem looming in the distance — slowing down deposits growth.
As a result, while the Reserve Bank governor’s policy statement on July 31 contained some nuanced messages — in keeping with the hallowed tradition of subtle, implicit messaging from the central bank — most of the public read the message only literally.
So next day, predictably, everybody voiced their disappointment at the absence of a rate cut and expressed their surprise at the SLR cut. This was my piece in next day’s ET (read here) highlighting some of the cues in the policy document.
But, two days after the policy, this article by Sugata Ghosh (read here) in ET really spelt out the problem, at which I had only hinted and which the Reserve Bank governor tackled without triggering off any alarm bells.
It may be instructive for market participants to get over their obsession with interest rate cuts and try to see the big picture once in a while. In the absence of any credible policy action, a rate cut seems to have become the default solution. The bitter truth is that there are no magic bullets left for the country’s economic problems.

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