Central bankers will be in the spotlight this week. The Reserve Bank of India’s new monetary policy is due on Tuesday. The US Fed will follow a day later.
The market turmoil of the past few weeks has radically altered the expectations about what Y.V. Reddy will do. Till a couple of weeks ago, it was widely assumed that RBI would not touch interest rates. It was hard to find a dissenting voice. Now, there is a growing chorus of voices demanding lower interest rates in India.
This is partly because the US Fed slashed policy rates by 75 basis points on 22 January, in response to a sell-off in the global markets. It was a panic reaction, in our view. The futures markets in the US are now betting on an additional 50 basis points cut this week.
The difference between the US and Indian interest rates has widened, which could pull more speculative capital into India and add to RBI’s headaches. Ben Bernanke has made Reddy’s job a bit more difficult.