By Andrei Skvarsky.
September’s unexpectedly big interest rate cut by the Indian central bank obviously aims to boost economic growth but is likely to spur the current outflow of capital from the country, intelligence company CEIC Data argues.
In what was this year’s fourth rate cut, the Reserve Bank of India (RBI) slashed the repo rate, its benchmark policy rate, by 50 basis points to 6.75%, a four-and-a-half-year low.
Many had expected a cut of only 25 basis points as on the previous three occasions, the intelligence firm, which is owned by London-headquartered publisher Euromoney Institutional Investor, says in a report.
Foreign institutional investors have been selling Indian equities and debt since May 2015. CEIC predicts that this process may accelerate soon and says the main reason is an anticipated policy rate hike in the United States but argues that September’s rate reduction by RBI may speed up capital outflow further as yields go down.
However, CEIC welcomes September’s rate cut as a measure that “provides the much-needed boost to investor confidence and demonstrates RBI’s commitment to promoting economic growth”. CEIC says business confidence in India has been waning since the start of 2015.
Moreover, the International Monetary Fund has trimmed its global growth forecast for 2015 to 3.1%, which means a potential decline in global demand and hence strengthens the case for stimulating domestic demand through monetary easing, the firm says.
CEIC also says September’s rate cut reflects a focus shift by RBI to boosting growth from inflation control. The company says inflation in India “has been running at a record low … declining steadily to 3.66% in August 2015”.
However, the effect of the rate cut will depend on how strictly Indian banks go along with RBI’s rate reduction policy, CEIC says. It says there is a record of lenders being “slow” to put RBI rate reduction edicts into practice.