Monetary policy: The backdrop
The key macroeconomic indicators RBI governor Raghuram Rajan will keep in mind when he makes his decision
Reserve Bank of India (RBI) governor Raghuram Rajan is widely expected to reduce the repo rate, the benchmark rate at which the apex bank lends to banks, by 25 basis points to 7.25% on Tuesday. One basis point is one-hundredth of a percentage point.
Economists reckon that lower inflation and a stable currency give RBI enough room for another rate cut, which would be its third in 2015. The central bank also needs to act quickly before interest rates in the US go up, they say.
Here are the key macroeconomic indicators Rajan will keep in mind when he makes his decision.
HSBC PMI
The Purchasing Managers’ Index (PMI), an early indicator of the health of the services and manufacturing sectors, has been above the 50 mark—indicating expansion—for the last six months, probably hinting that a recovery is round the corner.
Inflation
Consumer price inflation, the gauge most watched by RBI, has come off from a peak of 8.48% exactly a year ago to 4.87% now, well within the central bank’s 6% target for January 2016.
Index of Industrial Production
Industrial production data has been erratic recently swinging widely sometimes between contraction and rapid expansion.
GDP growth
Data released on Friday showed that India’s gross domestic product grew 7.3% in fiscal year ended March 2015. However, there are still questions about the accuracy of the new series.
Rupee
RBI’s buying of dollars in the foreign exchange market has ensured that the rupee has not strengthened sharply against the dollar. With US interest rates on the way up an impact of any interest rate move will also be part of RBI’s calculations.
10-year bond yield
The benchmark 10-year bond yield has eased substantially from a peak of more than 9% in 2013. Another rate cut by RBI could ensure that the yield falls below 7.5%.
FIIs
Foreign institutional investors (FIIs) have pulled out investments from both the debt as well as equity markets in May. This is the first time that India has seen dollar outflows from both markets in the same month since August 2013. It is likely that the markets will remain volatile in 2015 as US interest rates increase and Europe continues to be plagued by uncertainties.
Interest rates
RBI has already cut its benchmark repo rate by 50 basis points in 2015. Expectations are now that the central bank will announce another 25 basis point rate cut in its policy on Tuesday amid lower inflation.
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