As expected by roughly seventy percent of economists, the Reserve Bank of India (RBI) cut its key interest rate to 6% from 6.25% at Wednesday’s meeting. Four of the six members of the RBI’s Monetary Policy Committee voted for the change. Interest rates have not been this low in India since 2010.
The Indian rupee, which had already breached the critical 64.0 level against the US dollar one hour prior to the RBI’s announcement, went on to record its best day since May 19th. Rupee strength pushed USD/INR down a little more than 40 paise by the end of the New York session to a two-year low (a rupee high) of 63.60. The triggering of stop-loss orders below 64.0 – a level from which the exchange rate had bounced in April, May and June – propelled the rupee higher.
Yesterday’s move in the rupee takes its 2017 gain against the dollar close to 7%. The currency does, however, remain close to multi-month lows against several of the other majors, most notably the euro, against which it gained only 20 paise yesterday. EUR/INR ended the day at 75.47.
India’s central bank had been facing pressure ahead of its two-day meeting to cut the interest rate after June data showed inflation falling to a five-year low of 1.54% – well below the bank’s target of 4% and below its projection of 2.0-3.5% for the April-September period.
Part of the slowdown in inflation has been attributed by the RBI’s governor, Urjit Patel, to the introduction in July of a national goods and services tax (GST). The tax, which varies by item and can be as much as four times that paid on goods in other Asian countries like Singapore and Malaysia, “weighed heavily on the Indian manufacturing industry in July,” according to economist Pollyanna De Lima of IHS Markit. The tax is, however, expected to benefit and simplify India’s economy in the long term.
The rupee managed to hold on to gains despite a reduction in Indian rates partly due to technical reasons but more so because the RBI did not change their monetary policy bias at the meeting, which remains “neutral.” A change to “accommodative” would have indicated further rate cuts in the coming months.
The central bank said yesterday that it would remain on guard against inflation, which may soon be stoked by a housing rent allowance for government staff and a seasonal uptick in food prices.
“[We] will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway,” the bank said.
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