Craig Botham, Emerging Markets Economist at Schroders, explains
that the central bank has cut interest rates but a pause may have
been a more prudent option.
-
India’s central bank unexpectedly cut interest
rates by 25 basis points to 6.25%
-
Ahead of national elections, the cut is likely to
come under scrutiny for political motivation
-
We now expect rates to stay on hold until the
second half of the year
The Reserve Bank of India (RBI) delivered a
surprise rate cut under its new governor this morning, and
changed its stance from ‘calibrated tightening’ to neutral. The
move will please Prime Minister Modi and his ruling BJP, who
replaced the more hawkish former governor Patel with governor Das
in December last year. Given this recent appointment, and coming
as it does ahead of national elections in May, the cut will
unfortunately come under scrutiny for potential political
motivations.
A pause would have been the more prudent option,
in our view. While it is true that headline inflation continues
to fall, with the latest print just 2.2% year-on-year, this is
driven by food prices which are in contraction. Meanwhile, core
inflation continues to rise and the recent fiscal budget
announcements sound quite inflationary. There is no guarantee
that oil and food prices will remain helpful
either.
We think a cut may have been warranted later in
the year, had growth struggled. Waiting would also have given a
sense of the likely direction of fiscal policy; a more populist
government after the May elections would warrant a more hawkish
central bank, for example. We would therefore expect rates to be
on hold from here until the second half of the year, but given
that the bank has revealed a preference for dovishness, a
further cut in April would not totally shock
us.
