India Shocks with another Rate Cut

The Reserve Bank of India (RBI) shocked the financial markets with another rate cut in 2015. This sent Indian stock markets to a record high.

The RBI cut rates 25 basis points to 7.5 percent in order to combat weakening inflation and to reaffirm the government’s commitment to fiscal discipline. They last cut rates in mid-January when they cut its main rate 25 basis points to 7.75 percent.

After the cut the Nifty-50 index soared higher to 9,007 and the Sensex jumped to a two month high. The Indian Rupee also rose to 61.65 versus the US Dollar.

Off Cycle Rate Cuts the new Normal?

The time of off-cycle rate cuts will become the new normal. This is the RBI’s endorsement in the government’s new budget and attempts to reform the economy. On Saturday, the government pledged fiscal responsibility but would take another year to reach its fiscal deficit to gross domestic product (GDP) target of three percent. The RBI governor says the increased spending on infrastructure will be good for economic growth. This will help the country’s fiscal position.

Economists also feel the strengthening Rupee, which has increased two percent versus the US Dollar was another reason for the rate cut. This move will weaken the currency and bring in capital inflows.

A New Easing Cycle Gaining Momentum

There is a new cycle of monetary easing beginning in India. It has a long way to run and by the end of the year we could see up to 50-75 more basis points in cuts with a repo rate around seven percent or even 6.50 percent. We should see another cut by April and the repo rate below seven percent by the end of the year.

India’s RBI has joined some 20 central banks who have begun a monetary easing policy this year. China is among these banks who has cut its prime rate as well as well as the RRR to combat a slowing economy.