Markets flat after India's steep rate cut

Added 7th April 2016

India’s recent interest rate cut to a five-year low was a response to cooling inflation, analysts said.

Markets flat after India's steep rate cut

On Tuesday, the Reserve Bank of India (RBI) cut the key interest rate by 25 basis points to 6.5%, though the domestic market has not had a strong positive reaction because the move was widely expected by investors.

Central bank governor Raghuram Rajan pledged to keep monetary policy accommodative.

Mihir Kapadia, CEO at London-based Sun Global Investments, said more rate cuts could be expected if inflation continues to fall.

But Kapadia noted that despite RBI’s foremost priority to control inflation rates, “some industrialists will need more persuading - perhaps in the form of further improvement in business conditions” for them to keep investing in the world’s fastest-growing economy.

ANZ Banking Group in a recent note predicted that a pause in rate cuts, or perhaps one at most during the rest of the year, seems likely “given the RBI’s emphasis on core inflation.

“The core inflation has been sticky downward, stuck at close to 5% since end-2014,” according to a recent ANZ report.

Though inflation could drop below the RBI’s 5% inflation target in the coming months, such a drop would likely be temporary. 

But ANZ added that overall RBI's measures showed its stronger-than-expected commitment to reduce the large banking liquidity deficit.

Portfolio managers of Asia ex-Japan equity funds tend to favour India thanks to government reform efforts, according to a Morningstar report in February, FSA reported earlier.

India's GDP growth forecast for 2016-17 remains 7.6%, "with risks evenly balanced", ANZ predicted.

In February, India reported 7.3% GDP growth for Q3, overtaking China, which had 6.8% growth during the same period. 

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The MSCI India index peaked about one year ago.   

 Source: FE. Trailing three years.

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