After RBI's rate cut booster, time for govt to get its act together

Reserve Bank of India Governor Raghuram Rajan couldn't have found a better way to wish a happy new year (Pongal), with the RBI cutting rates by 25 basis points (bps) to 7.75 per cent.

The timing of the much-awaited rate cut came as a sweet surprise to the market with the BSE Sensex climbing more than 600 points to 27,960.

The RBI governor believes in data and it's not just the three-decade-low wholesale inflation (WPI) number or the decade-low consumer inflation number (CPI) that prompted a shift in monetary stance, but also the confidence that inflation will remain low and manageable in the future.

Today's rate cut has given confidence and created a case for continued rate cuts in the future.

The change in stance in monetary policy certainly gives the market a new confidence. The first step coming from the RBI is in the right direction and all eyes will now be on the government for supporting the growth initiative to revive the economy.

The Indian market and the economy have been a big beneficiary of external factors like the crash in crude oil prices, which are expected to stay low for a long time, easy global liquidity due to quantitative easing in major economies as well as expectation of further quantitative easing in the euro zone, and most importantly, a delay in rate hike by the US.

This has given more time for the government to get its act together so that global liquidity continues to flow into the country.

All eyes will be on the Union Budget 2015 now amid expectations the government will kick-start its reform process. The government has signalled time and again it stands for growth and the spending focus will be more from developmental and growth aspect than social spending. But it will have to be seen how the government plans its spending in the budget that will promotes development and starts the investment cycle.

Also, it has to be seen if the government gives a directional change from a public-private partnership model to engineering, procurement and construction model. Government spending has to come for obvious reasons as many companies are not in a good shape financially.

As far as the equity market is concerned, nothing much is expected to achieve until corporate India starts spending and this would happen when their existing capacity run at full capacity. Today's surprise rate cut could also help the banking sector to clean up their books.

Fundamentally, the crash in oil price is the only big factor for the markets to cheer so far.

Investors should tread cautiously and build their portfolio with quality companies and not think like a trader or be one.