Schroders' Emerging Markets Economist,
Craig Botham, comments on the Indian central bank’s decision to
hold rates at 6.25%:
"Following a trip to India at the end of last
year, we noted that domestic market participants were extremely
bearish on the impact of demonetisation despite a lack of
effective modelling methods for what was essentially an entirely
unique event.
The central bank too was more sanguine on the
impact, at least in public. Featuring more prominently in past
statements has been the bank’s view that inflation could rebound
somewhat in early 2017 on a range of effects. It seems that a
combination of better-than-expected growth data post
demonetisation, and those worries over inflation, have led to a
pause in the easing cycle.
The accompanying statement said in effect that
policy would be on hold until the bank’s economists can work out
exactly what demonetisation has done to growth and inflation, so
we would not rule out further rate cuts this year. At a minimum,
cuts will likely have to wait until the second half of the year,
when the bank’s most immediate inflation concerns will have
hopefully been assuaged.
However, we think it is more probable that growth
will recover after what will prove to be a short- lived
disruption. Much more cash returned to the banking system than
was expected, so long-term negative wealth effects will be
limited, and banks may utilise the higher liquidity to boost
lending. As this growth should also add inflationary pressure,
the compulsion for the central bank to cut further should be
correspondingly diminished."
