India: Second rate cut this year – Nordea Markets

Amy Yuan Zhuang, chief analyst at Nordea Markets, points out that the RBI has delivered its second rate cut this year due to weakening growth and low inflation.

Key Quotes

“The timing of the cuts raise the doubt about the RBI’s independence, given it’s a new governor with closer ties with the government and ahead of the election.”

“As expected, the Reserve Bank of India (RBI) cut its policy rate by 25bp to 6% today. This was the second rate cut this year after the new RBI governor delivered a surprise rate cut at the last meeting in February. The reverse repo rate was cut by 25bp to 5.75%. Two of the six-member monetary policy committee were against the cut.”

“Economic momentum in India has weakened in the past months amid a less favourable global growth environment. At the same time, inflation has fallen drastically, mostly attributable to a plunge in food prices. That gives the RBI room to ease monetary policy. Moreover, the rate cut is very welcome by the government ahead of the scheduled general election from 11 April to 19 May.”

“The INR has weakened versus the USD following the news. In the near term, we do not expect sharp movements in the INR, as EM FX waits for more signals from the global economic performance. If history offers a lesson, the upcoming election in India will also likely keep USD/INR range-bouncing in the coming two months.”