In yet another sign of the go-for-growth objective of global policy makers, the Reserve Bank of India has stepped in with a further 25 basis point cut in interest rates. The policy repo rate now stands at 7.75 per cent, with yesterday’s easing coming after a nine-month pause from the RBI.
In cutting interest rates, the RBI indicated that it has revised its outlook for GDP growth lower, from 5.8 per cent to 5.5 per cent. If realised, this would be the slowest rate of economic growth in India for a decade. The RBI indicated that "it is now critical to arrest the loss of growth momentum without endangering external stability”. Despite the downgrade to GDP, the RBI noted, somewhat optimistically, that "overall, global economic prospects have improved modestly since the Reserve Bank's last review in October 2012 even as significant risks remain.”
In announcing the interest rate cut, RBI Governor Duvvuri Subbarao said that "the stance of monetary policy in this review is intended to provide an appropriate interest rate environment to support growth as inflation risks moderate.”
There was some guidance on the future path for monetary policy, with Subbarao hinting that, in the event of lower inflation and no further concerns on the current account deficit, interest rates could be lowered further but "the message that we are trying to give is that as much as there is some space, it going to be quite limited, and we are going to use it with a lot of judgement on timing and quantum.”
In line with the slight downward revision to the GDP outlook, the RBI also cut its forecast for inflation for 2013-14 to 6.8 per cent from the prior forecast of 7.5 per cent and a peak inflation rate above 10 per cent during 2010. Subbarao noted that "the moderation in inflation conditions provides the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem growth risks.”
India’s Sensex stock index fell 0.6 per cent in reaction to the cautious approach from the RBI, with some analysts looking for strong hints that there would be further interest rate cuts ahead. That fall aside, the Sensex is still around 25 per cent above the late 2011 low point and is 115 per cent above the GFC low point in early 2010.
It is still seems very odd that India’s economic news gets so little attention in global markets and in Australia, given that the World Bank now estimates that it is the third largest economy in the world, behind only the US and China. India is Australia’s third largest export market and as a result in more important to the Australian economy than Spain or Italy or France.
India’s GDP is 15 times larger than Greece, a fact that is not reflected in the coverage or analysis of Indian economic events. If there is a scuffle from a few fascists in Athens or Prime Minister Antonis Samaras mulls over the path the debt reduction in Greece, markets shudder, traders are awoken at night and inevitably the local media cover it in excruciating detail.
India is also double the size of the United Kingdom economy, with the gap between the two widening at a staggeringly rapid pace. When Mark Carney was appointed as Bank of England governor there was widespread coverage of the event, even though he is just another ex-Goldman’s banker made good and is a good guy with an open mind to policy possibilities. To be sure, it is an interesting story. But when India implements a range of policy reforms, the RBI cuts interest rates, India’s economic outlook is downgraded or some other significant event unfolds, one must turn to less mainstream news sources to glean the information that could be important for global growth.
Let’s hope that situation changes, with India demanding greater and getting attention and coverage in the months and years ahead.
In the meantime, all of the above suggests the RBI interest rate cut is significant news. It is designed to lift economic growth in India and with that, the world economy. In concert with the stimulus in the G7 countries and unambiguously stronger news in global markets in recent months, it looks like 2013 will be a good one for the world economy, helped a little more by the RBI interest rate cut.