RBI has today announced that it is reducing the repo rate by 50 basic points. It is to be noted that there is no substantial reduction in inflation nor there is any respite from high import bill due to high prices of Crude. So why is this cut. Last October on 25th to be exact I had predicted that RBI is trying to extinguish fire with oil by raising the repo rate because such measure is inflationary. While inflation could not be controlled, high repo rate certainly adversely affected the cost of production resulting in steep fall in industrial production. Two steps forward, one step backward. The dance rhythm of RBI is amazing. Question is: If increase in repo rate was to control inflation and it worked, why reduce it now? There can be no answer for these steps are taken only for psychological effect. In reality it has no meaning or very little effect. In any case the economy is tumbling. I wonder if the Humpty Dumty has already tumbled? Let us wait and see!
© Sandeep Bhalla