Research and analysis

India: Reserve Bank of India (RBI) Intermeeting Rate Cut

Published 16 January 2015

This research and analysis was withdrawn on 8 August 2016

This publication was archived on 5 August 2016. This article is no longer current. Please refer to Overseas Business Risk - India.

0.1 This publication was archived on 4 August 2016.

This article is no longer current. Please refer to Overseas Business Risk - India.

1. Summary

The RBI announced a surprise 25bp rate cut following sustained disinflation. It had indicated the possibility of a intermeeting rate cut after its December policy meeting, dependent on incoming data. The rate cut is symbolic. It signals the future direction of monetary policy.

2. Detail

The RBI had a self imposed inflation target of 8% Consumer Price Inflation (CPI) by January 2015 and 6% CPI by January 2016. Inflation has been below the RBI’s 6% target for the last few months. CPI inflation came in at 4.4% for November. A resurgence was expected in December on less favourable base effects but the December reading was only slightly higher at 5% and still well below target. Wholesale Price Inflation (WPI) has also been close to 0% in November and December. Meanwhile growth remains sluggish and the recovery uneven, for example, while industrial production grew 3.8% in November this followed a 4% decline in October.

The RBI statement highlights the fact that lower than expected inflation has resulted from a sharper than expected decline in domestic food prices and the large fall in international commodity prices, particularly crude oil. A benign outlook on crude oil prices, lower household inflation expectations and the government’s commitment to its fiscal deficit target have prompted this shift in the RBI’s monetary policy stance. Inflation is now expected to be below 6% by January 2016.

The statement stresses that the factors that will determine further action are continued disinflation, sustained high quality fiscal consolidation and steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure.

2.1 Reactions

Most analysts are expecting 50-75bp of rate cuts in 2015. JP Morgan wrote that space for a large easing cycle does not exist, given (i) that the RBI has repeatedly hinted it does not want to overshoot in one direction only to have to reverse later when growth accelerates; and (ii) the need to maintain healthy, positive rates of return on policy rates to incentivize greater financial savings and thereby finance the projected pick-up in investment in the coming quarters.

3. Comment

The next monetary policy meeting is scheduled for February 3. This rate cut was a signal to both the market and the government that the RBI stands by its commitment to an “out of cycle” rate cut if incoming data surprised on the downside. The RBI will now watch for developments around the budget, particularly a commitment to fiscal consolidation before it decides its next move.

4. Disclaimer

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