The RBI Governor is all set to review the Monetary Policy on Tuesday and is widely expected to cut the repo rates. If he does so, it would be a cut for the first time in three years and after thirteen successive hikes in repo rates.
Repo rates are rates at which the RBI lends money to banks and a cut in these rates generally tend to bring down interest rates in the economy. A series of cuts spurs economic growth and also propels the stock markets.
It does so, because lower interest rates means corporate profitability improves and also money moves from debt instruments to equities.
Subbarao is expected to cut rates, due to faltering growth in the Indian economy and also due to the fact that inflation has remain subdued. The interesting thing to watch out for, if he cuts rates, would be the stance that he plans to take in the future. For example any hawkish statement that rates would not be cut successively may have an adverse bearing on the markets.
In any case, Monetary Policy Review are considered very important as they can give directions to fundamental changes in the economy. It's always a tough balancing act between inflation and growth. If rates are cut, it gives way to inflation, and if not cut, it hampers growth. The Governor faces a tough predicament, let's see which way he decides.