Schroders: India surprises with rate cut

The rate cut came in an ad-hoc meeting and comes on the back of continued low inflation, despite a slight pick-up in December. At 5%, CPI inflation is now almost half its level a year ago, and well below the 8% target for this year, and even 2016’s 6% target.

Inflation has been pushed downwards by lower food prices and global commodity prices, which are feeding into a broad range of domestic prices. Surveys also show inflation expectations have edged into single digit territory for the first time since 2009 – a key part of the battle against inflation.  This gives the central bank the room it needs to cut rates in support of growth, which struggled in 2014.

Though central bank governor Raghuram Rajan cited declining inflationary pressures, he warned that further easing would be dependent on fiscal consolidation and reform efforts. Signs that the government is losing discipline over its 4.1% fiscal deficit target could see a pause in the cutting cycle. Otherwise though, Rajan has previously signalled that any cut would take place only if he felt able to embark on a series of cuts, so further monetary easing seems assured. We expect to see 75 basis points of cuts this year, taking the repo rate to 7%.