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Today Reserve Bank of India (RBI) surprised market with 50 basis points policy ease, while no one was expecting more than moderate 25 basis points. RBI this year reduced policy rates by 125 basis points making it the one of the most dovish central bank in emerging markets. Repo rate now stands at 6.75% and reverse repo at 5.75%.
Why RBI frontloaded easing -
- RBI governor worried on broad slowdown in economic activity across global markets, which led to deterioration of global trade and increased volatility in financial markets.
- He is more worried over emerging markets as "China's intended rebalancing from investment towards consumption is being hit by the stock market meltdown, slower industrial production and weaker exports. The devaluation of the Renminbi on August 11, while mild, has unsettled financial markets across the world. Brazil and Russia are grappling with recession and runaway inflation, while South Africa is facing tightening structural constraints which threaten to tip it into a downturn".
- Though monsoon hasn't been very well in India, current low level of inflation gives RBI enough wiggle room and it has used it totally.
- According to RBI, greater cut could boost demand without adding to inflation, since firms are operating around 70% of their capacity.
- RBI feels that greater policy easing is likely to boost investment, since corporate spending current stands at quite a low.
Overall, RBI's move is likely to bode well for India as it is likely to keep the pressure low on domestic interest rates in a time when money is flowing out of emerging markets.
India's benchmark stock index, Nifty, which was down and made low around 7690 is currently up 170 points trading at 7853, up 0.8% for the day.
Indian Rupee is up 0.4% against Dollar, trading at 65.98.
