Avinash Vazirani, manager of the Jupiter India Fund, said that while it was a surprise, coming as it did ahead of the next RBI policy meeting that is set for 3 February, in hindsight, it shouldn’t have been a major one.
“Only yesterday, Governor Raghuram Rajan commented in an article that the global economy may be experiencing ‘secular stagnation’,” he said.
If this is the case, Vazirani added: “today's cut should be the first of many cuts the bank undertakes in 2015 and beyond.”
Indeed, he said, while the market now believes there is a further 50-75bps of cuts left in the current cycle. “We continue to believe that Indian monetary policy must be loosened much more significantly than current market expectations and that the longer Rajan waits to cut rates, the further they will have to fall.”
Craig Botham, Schroders emerging markets economist said that continued low inflation, which is now, at 5%, around half of what it was 12 months ago, and well below the Bank’s current target was the main reason for the cut.
But, he added: “Though central bank governor Raghuram Rajan cited declining inflationary pressures, he warned that further easing would be dependent on fiscal consolidation and reform efforts.”
Rajan has previously stated that the Bank would only cut rates if it felt able to make a series of cuts, Botham said, “so further monetary easing seems assured. We expect to see 75 basis points of cuts this year, taking the repo rate to 7%."
However, Botham cautioned: “Signs that the government is losing discipline over its 4.1% fiscal deficit target could see a pause in the cutting cycle.”
