Economists see high real rates as a threat to investment in an economy gripped by uncertainty before a general election next year and a crisis in the shadow banking sector that’s hurting domestic consumption. Photo: Bloomberg
Economists see high real rates as a threat to investment in an economy gripped by uncertainty before a general election next year and a crisis in the shadow banking sector that’s hurting domestic consumption. Photo: Bloomberg

Asia’s highest real rates may push RBI chief to ease policy

The benchmark interest rate, after adjusting for inflation, stood at 4.2% after data on Wednesday showed inflation slowed to 2.3%. That may push the RBI to shift to an easing bias and possibly cut interest rates next year

Mumbai: Asia’s highest real interest rates just got a lot higher after inflation in India slowed sharply in November.

India’s benchmark interest rate, after adjusting for inflation, stood at 4.2% after data on Wednesday showed inflation slowed to 2.3%. That may push the Reserve Bank of India’s new governor to shift to an easing bias and possibly cut interest rates next year.

Economists see high real rates as a threat to investment in an economy gripped by uncertainty before a general election next year and a crisis in the shadow banking sector that’s hurting domestic consumption.

Also read: ‘Talk to me’, says RBI governor Shaktikanta Das in relief to markets

“Number of factors are currently impinging on investment: weak external demand, high real interest rates, low capacity utilization and leveraged corporate balance sheets,’ economists at Nomura Inc. wrote in a report this week.

Governor Shaktikanta Das, who took charge on Wednesday, said growth was very much part of the inflation-targeting Reserve Bank of India’s focus. That added to the optimism in the bonds market about the next rate move.

Also read: RBI governor Urjit Patel resigns amid messy face-off with govt

Already, the one-year onshore swap rates are factoring a 50% chance of a interest rate cut around April or June, or 100% chance of a 25 basis-point cut in August, according to ICICI Securities Primary Dealership Ltd. That’s a turnaround from a view in October for a hike of 100 basis points over the next 12 months.

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