A prudent rate cut by RBI
The Reserve Bank of India’s (RBI) monetary policy committee has reduced the key policy rate by 25 basis points, as expected, but it has also done well to point out that inflation will inch up in the months ahead. That is perhaps the main reason why it has stuck to its guns by not changing its neutral policy stance.
Capital Economics pointed out in a recent report that in June, average inflation in emerging markets was at its lowest level since the global financial crisis, and added that emerging markets inflation will bottom out in the coming months.
It is also difficult right now to say for sure how much of the recent decline in inflation is structural and how much a result of disruptions such as demonetisation and the introduction of the goods and services tax (GST). Yet, inflation is no longer the danger it was as recently as two years ago.
What now? Despite the expectation that headline inflation will rise a bit in the coming months, there is still scope for another 25 basis points rate cut later in the year.