MARKETS: Reserve Bank of India surprises with interest rate cut

By Lukman Otunuga, Research Analyst, FXTM

The Reserve Bank of India (RBI) shocked market participants on Tuesday by not only cutting interest rates for the fourth time this year, but by a much larger amount than expected at 50 basis points. Although economic growth in India is strong, it is suffering from a decline in momentum and it is quite clear that the central bank is cutting interest rates to encourage further borrowing and to target domestic growth. The theme of falling commodity prices in addition to other concerns including the economic health of neighbouring Asian nations have added downside risks to the Indian economy, and we can see this with slowing GDP growth.
It appears that the probability of a continual slowdown in economic growth is high in India, and so the RBI has taken the steps to promote domestic momentum within the economy. It has recently been reported that economic growth through credit has declined to yearly lows, meaning it is clear that lower interest rates are being used as a catalyst to boost investment within the Indian economy.
It is also worth pointing out that RBI Governor Raghuram Rajan appeared confident that the inflation target at 6% can still be achieved, which moving forward means that if inflation is rising that there is limited scope for further interest rates cut from the central bank for the time being. This could actually be why the currency appreciated against the USD despite another interest rate cut.

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