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RBI Cuts Interest Rates To Boost Worlds Fastest Growing Economy
IndusView, Tuesday 2 June 2015 (London): The Reserve Bank of India (RBI) has today reduced its interest rates by 25 basis points to 7.25%, the third cut this year, taking advantage of subdued inflation to lend more support to India’s economy.
The Wholesale Price Index, India's most closely watched inflation gauge, has been in the negative zone since November 2014. In April last year, it was 5.55%. Deflationary pressure continued for the sixth month in a row with inflation dropping to a new low of (-) 2.65% in April, mainly on account of decline in prices of fuel and manufactured items even as food prices increased.
“High inflation has been a constant roadblock for policymakers struggling to breathe life into Asia's third-largest economy and the RBI can’t be complacent about meeting its medium term inflation target,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Today’s decision is unlikely to be the last in the current situation but we are predicting only one more 25 basis point cut.”
The cut comes after the Indian economy registered 7.5% growth in the January to March quarter compared with a year earlier. That made India the world's fastest growing major economy, overtaking China's 7% growth in the same quarter.
Current account deficit (CAD) is estimated to be around 1.5% of the GDP in the current fiscal, helped by sharp fall in oil prices even as gold imports rose in the past few months, the Reserve Bank said today. Gold imports spiked in the month of March and remained elevated in April owing to regulatory relaxations and festival demand. In the first half of the 2014-2015 fiscal, CAD was at 1.9% of the GDP or $18 billion.
South Asia's economic outlook is largely favorable since most economies are expected to experience a strengthening of growth in 2015-2016 on the back of stronger domestic consumption and investment, and a pick-up in exports. According to the United Nations report, the region is projected to reach a GDP growth of 6.7% in 2015 and 6.9% in 2016, up from an estimated 6.3% in 2014.
While portfolio and direct foreign investment flows were buoyant during 2014-2015, with net foreign direct investment into India at $36.6 billion and net portfolio inflows at $41 billion, the year 2015-2016 has begun with net portfolio outflows in the wake of a reduction in global portfolio allocations to India.
“There is a need to further improve the business environment. Reforms in the last one year are welcome, but more needs to be done in order to build foreign investors confidence,” said Rangar. “Decline in foreign investments could put pressure on the country’s balance of payments and also impact the value of the rupee.”
Australia and New Zealand have recently joined Japan in order to persuade India to open its rapidly growing e-Commerce sector for foreign investments. These countries want to include the sector in the 16-nation regional trade pact that's being negotiated.
India does not allow Foreign Direct Investment (FDI) in the business-to-consumer (B2C) segment but 100% FDI is allowed in business-to-business (B2B) transactions, marking the difference in rules for retail and wholesale. It allows 49% FDI in multi-brand retail but with restrictions.
The government is under pressure to come out with a policy on the e-commerce sector in four months as brick-and-mortar retailers have filed a case in the Delhi High Court on the issue.
The pact includes 10 Asean countries and the six partners with which they have free trade agreements (FTAs), including Australia, China, India, Japan, Korea and New Zealand.
Inflation Drop Leads to Unscheduled India Rate Cut
IndusView, Thursday 15 January 2015 (London): The Reserve Bank of India (RBI) today pared its repurchase rate by 25 basis points to 7.75% from the current 8%, citing easing inflationary pressures.
In an announcement before the stock markets opened for trading, the central bank said inflationary pressures have been easing since July and the path of inflation has been below the expected trajectory.
“Oil importing countries like India, China, Brazil, Turkey, Indonesia and South Africa will be the big winners as oil prices continue to weaken in 2015,” said Bundeep Singh Rangar, Chairman on London-based consulting firm IndusView. “What is critical is for nations to use this window to usher in fiscal and structural reforms, which can boost long-run growth and inclusive development.”
India imports 85% of its crude oil requirement. Net oil imports at $95 billion accounted for 21% of India's total import bill and 64% of the trade deficit in 2014.
In the accompanying policy statement, the RBI mentioned that inflation momentum has significantly reduced and household inflation expectations have eased to single digit for the first time since September 2009.
On the inflation outlook, the central bank said "on current policy settings, inflation is likely to be below 6% by January 2016". In the December policy statement the RBI had guided for a change in the monetary policy stance in early 2015, including outside the policy review cycle, if inflation data was supportive.
Making a decisive push towards generating investment to see the success of his 'Make in India' mantra, Prime Minister Narendra Modi said his government was trying to revive the economy, and told global investors that India today was a land of opportunities.
Mr Rangar recently attended The Vibrant Gujarat 2015, where Prime Minister Modi was addressing the seventh edition of the Summit. Modi laid down his government's plan and effort to create a policy environment that is predictable, transparent and fair.
By contrast with India, South Korea’s central bank chief today signaled he’s unwilling to reduce borrowing costs in response to an inflation rate pulled down in part by the slide in oil. Governor Lee Ju Yeol said the current interest rate of 2% is “not insufficient to support growth” and that the central bank will set future inflation targets soon.
The rate cut is a change in monetary policy stance and comes a few weeks earlier than expected due to the sharp fall in commodity prices and the better-than-expected December inflation print. Bloomberg’s Commodity Index is down nearly 28% since its 2014 peak in May, and 43% since its 2011 peak.
Rajan’s move today will spur commercial banks to lower lending rates for borrowers, K. Subrahmanyam, executive director at state-run Union Bank of India in Mumbai, said in a phone interview. State Bank of India, the country’s largest bank by assets, has left its base rate at 10 percent since November 2013.
Reserve Bank of India Ignores Oil Price Drop; Maintains Interest Rate
IndusView, Tuesday 2 December 2014 (London): The Reserve Bank of India (RBI) left its benchmark rate unchanged at 8.00% Tuesday, failing to take advantage of the drop in international crude oil prices and the resulting deflationary effect on India’s biggest import item.
The India crude basket, computed by the petroleum planning and analysis cell, was $72.51 per barrel on November 27 compared with $90.50 per barrel on October 9. The Indian basket of crude oil is based on the weighted average of Middle East sour grades (Dubai and Oman) and the North Sea Brent sweet grade of London.
Despite the lower oil price, RBI Governor Raghuram Rajan said he was still awaiting more proof that inflation was under control.
“Lower oil prices keeps inflation low and could have served as a cue for the RBI to reduce interest rates and foster GDP growth,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “It increases prospects of the Narendra Modi government meeting its fiscal deficit target for 2014-2015. A lower RBI rate would have helped ensure it also meets its GDP growth target.“
India imports more than two-thirds of its oil requirements, which constitutes 37% of total imports. A one-dollar fall in the price of oil saves the country about $648 million. Every $10 a barrel fall in prices lowers retail inflation by 0.2 of a percentage point and wholesale inflation by half a point, experts estimate. Lower oil prices, therefore, have a three-fold effect spread across the economy.
Cheaper energy moderates inflation, which has already fallen from over 10% in early 2013 to 6.5%, bringing it within the central bank’s informal target range. This should lead to lower interest rates, boosting investment.
Cheaper oil also cuts India’s budget deficit, now representing 4.5% of GDP, by reducing fuel and fertilizer subsidies: along with food subsidies, the total is $41 billion in the year ending March 2015—14% of public spending and 2.5% of GDP.
The government controls the price of diesel and compensates sellers for their losses. But, for the first time in years, sellers are making a profit. As in China, cheaper oil should reduce the pain of cutting subsidies. Since Oct. this year, India has ended diesel price subsides and raised the price of natural gas.
Gross domestic product expanded 5.3% in the July-September quarter from a year earlier, as a manufacturing slump took the bounce out of Asia’s third-largest economy. Growth in the previous quarter was at 5.7%. Thanks to growth in services and stronger-than-expected farming after a bad monsoon, the reading was higher than predicted by economists polled by Reuters, who on average forecast growth of 5.1%. On a year-on-year basis, trade deficit increased by 28.1 per cent during Q2 FY 15 (Jul-Sep) as compared with a decline of 24.1% in Q1 of 2014-2015.
Prime Minister Modi is keen to promote India as an investment destination. Moves are afoot to schedule Prime Minister Narendra Modi’s first bilateral visit to the United Kingdom for an event on January 30, the death anniversary of Mahatma Gandhi. The trip will be his first bilateral visit to Europe. U.S. President Obama is also due to visit to India as Chief Guest of its Republic Day parade on Jan. 26.