India: Rate cut a risk to RBI credibility – Nordea Markets

Amy Yuan Zhuang, chief Asia analyst at Nordea Markets, points out that the Reserve Bank of India (RBI) unexpectedly cut the main repo rate by 25bp to 6.25%, just six months after its latest rate hike. 

Key Quotes

“Both we and the consensus expected the rate to stand unchanged at 6.5%. This marks a sharp reversal of monetary policy from “calibrated tightening” to neutral. The reversal repo was cut by 25bp to 6% and the cash reserve ratio was left untouched at 4%.”

“The rate cut reflects that the RBI’s concerns have shifted from inflation to growth. CPI inflation has declined steadily from close to 5% in June last year to 2.2% in December, mainly due to falling food prices. At the same time, growth momentum is weakening. Most recent data, such as industrial production, exports, imports and car sales, have deteriorated.”

“Although the rate cut is welcome from a growth perspective, it bears the risk of undermining the RBI’s credibility.”

“Moreover, the sharp policy reversal raises the question about whether the RBI’s inflation target is well-anchored.”