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RBI Bows To Political Pressure With Unexpected Rate Cut
RBI Bows To Political Pressure With Unexpected Rate Cut
Fed Chairman Jerome Powell isn’t the only leader of a major central bank to capitulate to political (and market) pressure so far this year. On Thursday, RBI Gov. Shaktikanta Das during his first meeting at the helm of the bank led a 4-2 vote to cut rates after raising them twice last year.
Shaktikanta Das
Das was widely seen bowing to pressures from Prime Minister Nahrendra Modi, who is desperately trying to boost economic growth ahead of a re-election fight later this year. As one analyst at Mizuho Bank pointed out, the move risks reviving inflationary pressures in India after they had largely eased last year. Das was hastily appointed to lead the central bank in December after his predecessor quit following a very public battle over the RBI’s autonomy.
“If caught wrong-footed by higher oil, twin deficit worries and global risk aversion, the rupee may have to pay the price for monetary complacency, whether perceived or real,” says Vishnu Varathan, head of economics and strategy at Mizuho Bank Perceptions matter for India’s monetary policy, which is trying to target inflation expectations USD/INR may rise above 72.5 over the next 3-4 months; Mizuho’s view was for a prolonged hold in policy
The RBI cut its repurchase rate 25 basis points to 6.25%, a move that only 11 of 43 economists polled by Bloomberg had anticipated. The rest had expected no change.
The board also voted unanimously to switch the central bank’s policy stance to neutral from “calibrated tightening.”
Unsurprisingly, the Indian government cheered the cut, with Finance Minister Piyush Goyal tweeting that it would “give a boost to the economy, lead to affordable credit for small businesses, home buyers etc. and further boost employment opportunities,” said Indian Finance Minister Piyush Goyal in a post on Twitter.
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The Latest Evidence That Global Trade Has Collapsed: India’s Exports/Imports Plunge By 25%
The Latest Evidence That Global Trade Has Collapsed: India’s Exports/Imports Plunge By 25%
Late last month, India surprised 51 out of 52 economists when the RBI cut rates by 50bps.
Although economists have a reputation for being terrible when it comes to making predictions (getting it wrong perpetually is almost a job requirement), it’s difficult to understand how 51 of them failed to see a cut of that magnitude in the cards.
After all, it was just a little over a month earlier when the Indian government’s chief economic advisor Arvind Subramanian told ET Now television that India may need to “respond” to China’s monetary policy stance. He also hinted at further export weakness to come.
Here’s what the REER picture and the export picture looked like going into the RBI meeting:
And here’s what Deutsche Bank had to say in August:
Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. Global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.
Hence the outsized rate cut.
So that’s what the picture looked like going into Thursday’s export data and unsurprisingly, the numbers definitively show that global trade is in freefall. Here’s Reuters:
India’s exports of goods shrank by nearly a quarter in September from a year ago, falling for a 10th straight month and threatening Prime Minister Narendra Modi’s goal of boosting economic growth through manufacturing.
India’s economy, Asia’s third largest, is mostly driven by domestic demand, but the country has still felt the effects of China’s slowdown. Exports have dropped and consumer and industrial demand for imports has weakened.
Imports fell 25.42 percent in September from a year earlier to $32.32 billion.Exports stood at $21.84 billion, according to data released by the Ministry of Commerce and Industry on Thursday.
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