Must-know: India eases monetary policy by reducing its repo rate (Part 7 of 7)
Stance shift
The Reserve Bank of India’s (or RBI) decision to raise interest rates is a clear shift in its monetary policy stance. The last time the central bank changed the repo rate was about a year back, when it raised the rate to 8.00% on January 28, 2014. Vast improvement in inflation and inflation expectations helped the RBI change its stance.
The Indian central bank’s decision boosted equities (EPI) (PIN) (INDA), as we saw in the previous article. However, it also drew praise from India’s finance minister, Arun Jaitley, who noted, “The RBI decision to cut the interest rate will lead to more money in the hands of the consumer for greater spending.” He added that the move will revive the investment cycle that “the government is trying to restore.”
Let’s take a look at the course India’s monetary policy may take going forward.
What lies ahead?
In its fifth bimonthly policy statement issued in December 2014, the RBI stated, “If the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle.” This is precisely what the central bank did.
Even after implementing a rate cut, the central bank stands by that statement. Further easing will depend on:
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data confirming a lower trajectory for inflation
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sustained “high quality” fiscal consolidation, a reference to India’s fiscal deficit (the figure for fiscal 2015 is a targeted figure, not actual)
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availability of power, land, minerals, and infrastructure
The last point would help ensure that “potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation.” Inflation will remain a key factor to watch in 2015, as we highlighted in our series Investors should watch out for India’s indicators in 2015. If crude oil prices (USO) (OIL) and food prices remain low—and power, land, minerals, and infrastructure are provided as required—2015 can become an interesting year for India.
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