Forex Marketz Daily Forex News – Fully Markets Update
Early this morning, the Reserve Bank of India (RBI) surprised with an unscheduled rate cut. This is an attempt to spur growth in their giant economy and kick start inflation, as that has slowed as well.
The RBI cut 25 basis points off its key rate to 7.75 percent. This is the banks first rate cut since March 2013. The surprise was that the central bank was not supposed to have a policy meeting till February 3.
The day before, wholesale inflation data rose only 0.11 percent annually in December. This was way below the 0.6 percent mark that was expected. The price of oil and food costs where the main driver for a lower inflation print.
Weak Food and Oil Prices are Dampening Inflation
After cutting rates, the RBI released a statement which said that weak inflation along with the falloff in crude prices was the reason behind this decision today. They also want to maintain their fiscal deficit target and these recent problems have given them a reason to shift their monetary policy.
The timing of this decision is a surprise. The RBI shunned the possibility of an inter-meeting rate move back in December but they did show that they had front-run expectations in the financial markets at that time. The RBI policy makers are now showing confidence with their changing outlook on inflation which is stemming from weak global commodity prices. The RBI is also putting a lot of faith in the current government’s efforts to consolidate the fiscal situation and push reforms. The RBI is hoping these financial reforms will keep their targets in check.
The RBI Means Business
Today’s rate moves indicates that inflation is moving in a direction to the point where the RBI senses disinflation. This is not great news, hence today’s rate cut. We could also get another 50 basis point cut through this year into 2016. With that said the RBI needs to keep on the narrowing exports situation and the recent shift in the U.S. Federal Reserve’s (Fed) expectation of a rate hike this year. This rate cut could also change nothing.
Indian Corporations have not been investing money, not because they were waiting on rate cut but because they have concerns and are waiting on the major structural reforms and clarity on government policy. Especially on land acquisition and environmental policies before the commit to investments into expansion.
