India’s central bank cuts key lending rate to 6.75 percent
“Therefore, the Reserve Bank has front-loaded policy action by a reduction in the policy rate by 50 basis points”. As it is, the ASSOCHAM does not expect the exports to go beyond Dollars 268 billion in the current fiscal as against USD 310 billion.
The RBI expects the January 2016 target of 6 percent inflation is likely to be achieved.
While the central bank has delivered three rate cuts totalling 75 bps since the beginning of the year, it has not been able to pull up credit growth and lending.
Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 percent, and the marginal standing facility (MSF) rate and the bank rate to 7.75 percent, it says. “Taking all this into consideration, inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection”, he said.
But another rate cut may depend on how food prices impact consumer inflation starting in September, given India could be facing its driest year since 2009 as monsoon rains have fallen below their long-term average. Bank, on their part, have turned cautious after a rising tide of stressed and non-performing assets, pushing back investment by domestic industry.
Rajan last month resisted pressure from the government to ease borrowing costs to ensure his inflation target isn’t at risk from surging food prices, a poor monsoon and a possible increase in USA interest rates.
In case of the wholesale price index (WPI), inflation plunged to a historic low of -4.95 percent in August. “Since then, inflation has dropped to a nine-month low, as projected”, the statement read. This should be done before the U.S. Federal Reserve decides to raise its own interest rates, which will cause a crowding out of investments from emerging markets into fixed income US treasury bonds & USA dollar-denominated assets. The exporters must also be supported by a lower interest rate regime.
Market watchers said though a token reduction of only 25 basis points “won’t do much” for the rupee, a “booster dosage” of almost 50 basis points might do the trick in spurring both the equity and currency markets. This was acknowledged by the RBI today. But I don’t think we were excessively aggressive.
Remember that China has, meanwhile, added another domino on the table for central bankers to contend with.