Emerging Markets

India Tries To Avoid Emerging Market Chill With Rate Cut - Wealth Managers' Reactions

Tom Burroughes Group Editor 30 September 2015

India Tries To Avoid Emerging Market Chill With Rate Cut - Wealth Managers' Reactions

Wealth and asset managers comment on yesterday's interest cut by India.

India’s economy has been a relative good-news story for the past year or so with investors continuing to give a cautious welcome to the Modi administration. But the wider woes of the emerging market world, and China’s deceleration, has taken its toll. The MSCI India index of equities (in dollars) is down almost 8 per cent so far this year. The Reserve Bank of India, the central bank, cut its benchmark interest rate by 50 basis points to 6.75 per cent yesterday. A number of organisations, such as wealth managers, have commented on the move and what is likely to happen next. Here is a selection of views.

Aidan Yao, senior emerging market economist at AXA Investment Managers
While we thought a rate reduction was very likely (in both September and December), we did not expect the RBI to frontload the rate cuts. Today’s decision was designed to provide a bigger cushion for the economy against the global turmoil and rapidly receding inflation. Barring substantial further shocks, we now expect the RBI to hold the interest rate for the remainder of this year. Longer-term policy trajectory will be contingent on the central bank achieving its 2016/17 inflation target of 5 per cent. We think the RBI will continue to have a bias towards easing next year.

Avinash Vazirani, manager of the Jupiter India Fund
The Reserve Bank of India (RBI) may have cut its benchmark interest rate by 50 basis points to 6.75 per cent, but a tame inflation outlook suggests there is room for a further 50 to 75 basis point cut in the next six to nine months. 
With consumer price inflation running at 3.7 per cent in August, the RBI, in our view, is unlikely to meet its aim, under its inflation-targeting regime, of achieving 6 per cent inflation by January 2016.

There are two main factors keeping a lid on rising prices: The reduction in commodity prices has given Indian companies greater leeway to cut prices on the goods they produce, creating an atmosphere in which competitive price cutting has thrived; the fast penetration of internet access in India means that it has become much easier for the average Indian to compare prices for goods and services, forcing companies to be more competitive.

The RBI also took a number of other measures we believe will provide a boost to the Indian economy by increasing the availability of credit. The decision to cut the statutory liquidity ratio (SLR) - the amount of money that banks have to hold in the form of government bonds - is a welcome move. The RBI has cut the SLR by one full percentage point, which will be staggered over four quarters. Although the cut is academic because the average Indian bank already has 500 basis points of excess SLR on their books, it does represent a clear signal from the RBI that it wants to Indian banks to increase their lending.

A second measure to allow foreigners to buy up to 5 per cent of total outstanding rupee-denominated federal government bonds, up from 3.8 per cent should also provide further stimulus to the economy as investors are likely to be attracted to the higher yields they can obtain in India relative to other emerging markets.

Finally, those Indian companies, which have the ability to borrow money abroad, will now be able to issue bonds in rupees rather than exclusively in foreign currencies. These so-called ‘Masala bonds’, aimed primarily at foreign investors, could provide a useful additional source of funding for Indian companies. 

Against this backdrop, it is my view that India is likely to remain one of the bright spots in an otherwise turbulent time for emerging markets. We remain confident about the positioning of our portfolios amidst the global volatility.

Kunal Desai, head of Indian equities at Neptune Investment Management
Today marks the third time rates have been cut, taking it to 100 basis points this year, underlining the RBI’s commitment to supporting strong economic growth. “RBI Governor Raghuram Rajan took a more dovish tone today than in recent history, intimating that the rate cycle will largely follow inflation data which continues to show disinflationary trends. The inflation target for March 2016 has been adjusted down to 5.8 per cent (from 6 per cent) and an intermediate target for March 2017 has been set at 4.8 per cent (down from 5 per cent).

However, there were two other important details that I believe have particular significance. Firstly, RBI Governor Rajan has revealed that their definition of real rates has changed to the 1 year T-bill minus inflation. He mentioned that 1.5-2 per cent real rates would be desirable. 1 year T-bill rates typically quote 25 basis points above the headline interest rate and real rates sit above target at 3.6 per cent. This means that from a rate cutting perspective there is more to go.

Secondly, the RBI announced a much larger than expected expansion of limits for foreign investment in Indian bonds. This amounts to a 5 per cent increase of the outstanding stock and should translate to roughly $25 billion over the next 30 months. These measures further open up and deepen the bond market, which is a big positive.

As we have been arguing over the past few months, we expect India to diverge from other emerging markets and continue on its monetary loosening agenda. The government and RBI have worked hard together to iron out a number of frailties from an external vulnerability perspective. The current account and fiscal deficits are under control, inflation continues to fall, growth is accelerating and lower crude prices continue to support the rupee.

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