Inflation Drop Leads to Unscheduled India Rate Cut

IndusView, Thursday 15 January 2015 (London): The Reserve Bank of India (RBI) today pared its repurchase rate by 25 basis points to 7.75% from the current 8%, citing easing inflationary pressures.

In an announcement before the stock markets opened for trading, the central bank said inflationary pressures have been easing since July and the path of inflation has been below the expected trajectory.

“Oil importing countries like India, China, Brazil, Turkey, Indonesia and South Africa will be the big winners as oil prices continue to weaken in 2015,” said Bundeep Singh Rangar, Chairman on London-based consulting firm IndusView. “What is critical is for nations to use this window to usher in fiscal and structural reforms, which can boost long-run growth and inclusive development.”

India imports 85% of its crude oil requirement. Net oil imports at $95 billion accounted for 21% of India's total import bill and 64% of the trade deficit in 2014.

In the accompanying policy statement, the RBI mentioned that inflation momentum has significantly reduced and household inflation expectations have eased to single digit for the first time since September 2009. 

On the inflation outlook, the central bank said "on current policy settings, inflation is likely to be below 6% by January 2016". In the December policy statement the RBI had guided for a change in the monetary policy stance in early 2015, including outside the policy review cycle, if inflation data was supportive.

Making a decisive push towards generating investment to see the success of his 'Make in India' mantra, Prime Minister Narendra Modi said his government was trying to revive the economy, and told global investors that India today was a land of opportunities.

Mr Rangar recently attended The Vibrant Gujarat 2015, where Prime Minister Modi was addressing the seventh edition of the Summit. Modi laid down his government's plan and effort to create a policy environment that is predictable, transparent and fair.

By contrast with India, South Korea’s central bank chief today signaled he’s unwilling to reduce borrowing costs in response to an inflation rate pulled down in part by the slide in oil. Governor Lee Ju Yeol said the current interest rate of 2% is “not insufficient to support growth” and that the central bank will set future inflation targets soon.

The rate cut is a change in monetary policy stance and comes a few weeks earlier than expected due to the sharp fall in commodity prices and the better-than-expected December inflation print.  Bloomberg’s Commodity Index is down nearly 28% since its 2014 peak in May, and 43% since its 2011 peak.

Rajan’s move today will spur commercial banks to lower lending rates for borrowers, K. Subrahmanyam, executive director at state-run Union Bank of India in Mumbai, said in a phone interview. State Bank of India, the country’s largest bank by assets, has left its base rate at 10 percent since November 2013.