In its fourth cut since the beginning of the year, India’s central bank cut interest rates by a more-than-expected 50 basis points. The Reserve Bank of India reduced its key repo rate to 6.75%, more than market expectations of 7%. The repo rate is the level at which the central bank lends to commercial banks.
A Reuters poll released last week showed only one out of fifty-one economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut.
Consumer inflation currently stands well below the central bank’s target of 6% for January next year with annual economic growth in India falling to 7% between April and June, slower than the 7.5% in the previous quarter.
Low Inflation
The reserve bank of Asia’s third largest economy has been under pressure to boost growth after inflation hit a record low of 3.6% in August due to falling commodity prices and has already cut the policy rate by 75 basis points this year– in January, February and June in an effort to boost low inflation.
At least 35 percent of India’s exports come from commodities-linked products including refined petroleum, gold jewelry, gems, iron and steel. The export value of refined fuels – which make up nearly one-fifth of total exports – is down 51 percent on-year this fiscal year amid falling prices and weak demand. Similarly, gold jewelry exports are down 20 percent on year, while iron and steel exports are down 30 percent, according to the bank.
According to Taimur Baig, chief economist at Deutsche Bank, “India’s miners are seeing sharp contraction in their earnings, agriculture commodity producers are seeing their earnings affected due to the weak price of agriculture products, and the gems/jewelry sector is undergoing a major downturn.”
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