India’s rate cut: More to follow?

Kunal Desai, head of Indian Equities at Neptune Investment Management comments on the rate cuts and what this means for economic growth in India. 

Today marks the third time rates have been cut, taking it to 100 basis points this year, underlining the RBI’s commitment to supporting strong economic growth.

RBI Governor Raghuram Rajan took a more dovish tone today than in recent history, intimating that the rate cycle will largely follow inflation data which continues to show disinflationary trends. The inflation target for March 2016 has been adjusted down to 5.8% (from 6%) and an intermediate target for March 2017 has been set at 4.8% (down from 5%).

However, there were two other important details that I believe have particular significance.

Firstly, RBI Governor Rajan has revealed that their definition of real rates has changed to the 1 year T-bill minus inflation. He mentioned that 1.5-2% real rates would be desirable. 1 year T-bill rates typically quote 25 basis points above the headline interest rate and real rates sit above target at 3.6%. This means that from a rate cutting perspective there is more to go.

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