Econintersect: The RBI (Reserve Bank of India) has cut the benchmark repurchase rate by 25 basis points from 8% to 7.75%. The move was totally unexpected and all things Indian surged: stocks, bond and the rupee. The 10-year Treasury bond interest rate dropped 10 basis points to 7.76%, the rupee strengthened against the dollar to an exchange rate of 61.72, 0.6% better than the previous rate near 62 to the dollar. The Mumbai Sensex stock index is up more than 2.2% as this is written. Most other Asian markets are quiet except for Tokyo (+1.9%) and Shanghai (+3.5%).
The timing of the rate cut was all the greater a surprise because it came three days after an increase in the CPI was announced. Inflation had been trending sharply lower in the second half of 2014 but the final reading of the year produced a year-over-year CPI increase of 5%, up from November’s 4.38%. Some thought the one-month increase might give the hawkish RBI Governor Raghuram Rajan justification to delay considering a rate cut. When he made the announcement, Rajan said that “consumer price inflation will probably be below the bank’s target of 6% by January 2016“.
Written by John Lounsbury
Unscheduled India Rate Cut Sends Stocks Soaring (Kartik Goyal and Sandrine Rastello, Bloomberg, 15 January 2015)
Consumer inflation eases, industrial output recovers (Reuters, The Times of India, 12 January 2015)
India Inflation Rate (Trading Economics, 12 January 2015)