India: Betting on an upswing

June 25, 2015 2:39 PM (UTC+8)

 

India’s financial leaders are optimistic that Asia’s third-largest economy will see a cyclical upswing after its recent interest rate cut.

Asia Unhedged certainly hopes so.

The Reserve Bank of India started June with its third rate cut of the year. The central bank cut its key repo rate to 7.25% from 7.5%, taking advantage of subdued inflation to support economic growth. In the first quarter, the Indian economy grew 7.5% compared with the year-ago period, and topping the 7% growth posted by China.

This is good news, but we think India still needs to compete more effectively against shifting geopolitical factors and competition.

“We’ve already had 75 basis points of interest rate cuts,” junior Finance Minister Jayant Sinha said Thursday during a speech at an industry event. “We are going to see that cyclical upswing that happens when rates come down and inflation is under control. So that’s the first growth driver.”

Meanwhile, the RBI also released on Thursday its Financial Stability Report 2015. In it, Reserve Bank Governor Raghuram Rajan wrote that the country’s economy has rebounded over the past two years, but that moves by other central banks, specifically the US Federal Reserve Bank, could create more volatility.

“The macro-economic fundamentals have improved and we have also been able to build buffers to fight any future uncertainty,” he said, adding that “we need to be vigilant.”

Focusing on the “taper tantrums” that began in 2013 when the Fed hinted at reversing its easy money policy, Rajan said, “With back-to-back quantitative easing by other major central banks, alongside the possible tightening by the Fed, what we have seen might be only one of a series of such ‘tantrums’ that the global markets are likely to witness.”

“There is a need to be vigilant about the spillovers (of the Fed ending the near-zero interest rate regime),” said Rajan. “For India, what matters is reducing inefficiencies as also improvements in non-price competitiveness.”

FSR is published by a sub-committee of the Financial Stability & Development Council headed by the RBI Governor.

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