Three months ahead of general elections, the new Reserve Bank of India (RBI) Governor Das surprised the marketplace with a rate cut of 0.25%, putting the Current Rate at 6.25%. No change had been expected. Headline inflation shows slowdown since June 2018, positioned below RBI’s target band of 2–6 % and provides signs of weakness. Official figures are questionable, however: real inflation is at 5.70%, the upper part of the target range.
The cut comes perfectly for India’s ruling party Bharatiya Janata, which is willing to boost the economy by providing more aggressive lending to support rural areas and expand tax cuts for middle-class families at the expense of larger borrowing and a wider fiscal deficit with expected lower borrowing costs. Investors have reacted positively, with sovereign bonds rallying. The long-term trend might go in the opposite direction, if the revenue deficit overreaches budget targets, especially for longer-end treasuries. INR is holding, about to finish the week in positive territory against the greenback (week-to-date: -0.31%; year-to-date: 1.81%). Currently trading at 71.06, we expect USD/INR to head along 71.80 short-term.
By Vincent Mivelaz
