India: Interest Rates Unchanged Despite Slowing Economy

June 20th, 2012
in Background

Written by Gavin Kakol, GEI Associate

Despite the continual slow down of the Indian economy, the Reserve Bank of India (RBI) did not change interest rates during the mid-term policy review rupeeSMALLon Monday.  Finance Minister Pranab Mukherjee's reaction to the situation was calm in his statement that inflation may have weighed on the decision and its normally unnecessary to consult the minister during mid-quarter review.   The depreciation of the rupee may have been one of many additional factors that may have played a part in the decision.

Follow up:

Markets responded accordingly Monday.  The BSE Sensex peaked at 17099.8  before dropping to a low of 16647.52 by 2:15. The index represents 30 large companies in various industrial sectors of the Indian economy.

A number of economists believe interest rate cuts are coming in the near future.   Sonal Verma, an economist  from the financial service group Nomura, expects a cut in rates after the July 19th presidential election following a month of stagflation.

On Tuesday the Rupee hit a 2 1/2 week low.  Traders fear the Rupee could continue to fall to its all time low of 56.52 to the dollar.  If this happens the RBI may be prompted to intervene, but that would be problematic because a currency is usually supported by higher interest rates and a slowing economy would call for lower interest.  Recently Fitch has joined Standard & Poors to regard India's future outlook as negative.  This is all in midst of eight months of declining manufacturing.

The following graph shows the dramatic 27.6% decline of the rupee against the U.S. dollar over the past eleven months.



  • BSE Sensitive (Yahoo Finance, 20 June 2012)



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