Rate Cut Surprise Aimed At Boosting Indian Economy

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Written By Hasan Rezazadeh

India is the latest emerging market economy to show signs of faltering as the central bank surprisingly slashed interest rates for the fourth time this year.

The senior emerging economies of the BRIC countries – Brazil, Russia, India and China – are all suffering pain as output falls and inflation rises.

The reasons may vary between each country.

Russia, for instance, is shouldering the burden of economic sanctions from Europe and the US after the incursion in The Ukraine. Moscow is also struggling to tackle the fallout from plunging oil prices as one of the world’s leading producers.

China’s growth has slowed from a double-digit powerhouse over the past two years or so, which has drastically cut the demand to eat up resources such as oil, ores and other commodities for manufacturing goods.

Emerging market problems

Meanwhile Brazil is tackling high inflation and a slowing economy.

India is not immune from these problems, although as a consumer of oil rather than a producer, the economy has had a different experience as the price per barrel halved.

Businesses have found production costs easing and margins improving, but growth dropped 0.5% to 7% this year, while inflation rose to 6%.

The Reserve Bank of India, the country’s central bank, is also concerned that if the US Federal Reserve hikes rates, cash will flow out of India.

So, the bankers lopped another 0.75% off rates, bringing the commercial lending rate down to 6.75% from 7.25% along with some indication the rate could slip even lower later in the year.

The rate had already dropped 0.75% in three cuts earlier in the year.

Fragile recovery

“A slow but fragile economic recovery is underway in India,” RBI governor Raghuram Rajan said in a statement.

“Investors are likely to feel more confident and help businesses boost economic demand if there is more certainty about the extent of monetary stimulus in the pipeline. This rate cut and the possibility of another before the end of the year is aimed at promoting that confidence.”

The cut put interest rates at the lowest in India since March 2011.

Analysts commented that the RBI is not independent of government control, unlike other major central banks, and that Rajan has been under intense political pressure from within the government to make the cut to stimulate the economy.