Emerging Markets
India Tries To Avoid Emerging Market Chill With Rate Cut - Wealth Managers' Reactions

Wealth and asset managers comment on yesterday's interest cut by India.
India’s economy has been a relative good-news story for the past
year or so with investors continuing to give a cautious welcome
to the Modi administration. But the wider woes of the emerging
market world, and China’s deceleration, has taken its toll. The
MSCI India index of equities (in dollars) is down almost 8 per
cent so far this year. The Reserve Bank of India, the central
bank, cut its benchmark interest rate by 50 basis points to 6.75
per cent yesterday. A number of organisations, such as
wealth managers, have commented on the move and what is likely to
happen next. Here is a selection of views.
Aidan Yao, senior emerging market economist at AXA
Investment Managers
While we thought a rate reduction was very likely (in both
September and December), we did not expect the RBI to frontload
the rate cuts. Today’s decision was designed to provide a bigger
cushion for the economy against the global turmoil and rapidly
receding inflation. Barring substantial further shocks, we now
expect the RBI to hold the interest rate for the remainder of
this year. Longer-term policy trajectory will be contingent on
the central bank achieving its 2016/17 inflation target of 5 per
cent. We think the RBI will continue to have a bias towards
easing next year.
Avinash Vazirani, manager of the Jupiter India Fund
The Reserve Bank of India (RBI) may have cut its benchmark
interest rate by 50 basis points to 6.75 per cent, but a tame
inflation outlook suggests there is room for a further 50 to 75
basis point cut in the next six to nine months.
With consumer price inflation running at 3.7 per cent in August,
the RBI, in our view, is unlikely to meet its aim, under its
inflation-targeting regime, of achieving 6 per cent inflation by
January 2016.
There are two main factors keeping a lid on rising prices: The
reduction in commodity prices has given Indian companies greater
leeway to cut prices on the goods they produce, creating an
atmosphere in which competitive price cutting has thrived; the
fast penetration of internet access in India means that it has
become much easier for the average Indian to compare prices for
goods and services, forcing companies to be more competitive.
The RBI also took a number of other measures we believe will
provide a boost to the Indian economy by increasing the
availability of credit. The decision to cut the statutory
liquidity ratio (SLR) - the amount of money that banks have to
hold in the form of government bonds - is a welcome move. The RBI
has cut the SLR by one full percentage point, which will be
staggered over four quarters. Although the cut is academic
because the average Indian bank already has 500 basis points of
excess SLR on their books, it does represent a clear signal from
the RBI that it wants to Indian banks to increase their
lending.
A second measure to allow foreigners to buy up to 5 per cent of
total outstanding rupee-denominated federal government bonds, up
from 3.8 per cent should also provide further stimulus to the
economy as investors are likely to be attracted to the higher
yields they can obtain in India relative to other emerging
markets.
Finally, those Indian companies, which have the ability to borrow
money abroad, will now be able to issue bonds in rupees rather
than exclusively in foreign currencies. These so-called ‘Masala
bonds’, aimed primarily at foreign investors, could provide a
useful additional source of funding for Indian
companies.
Against this backdrop, it is my view that India is likely to
remain one of the bright spots in an otherwise turbulent time for
emerging markets. We remain confident about the positioning of
our portfolios amidst the global volatility.
Kunal Desai, head of Indian equities at Neptune
Investment Management
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 per cent (from 6 per
cent) and an intermediate target for March 2017 has been set at
4.8 per cent (down from 5 per cent).
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 per cent
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 per cent. This means that from a
rate cutting perspective there is more to go.
Secondly, the RBI announced a much larger than expected expansion
of limits for foreign investment in Indian bonds. This amounts to
a 5 per cent increase of the outstanding stock and should
translate to roughly $25 billion over the next 30 months. These
measures further open up and deepen the bond market, which is a
big positive.
As we have been arguing over the past few months, we expect India
to diverge from other emerging markets and continue on its
monetary loosening agenda. The government and RBI have worked
hard together to iron out a number of frailties from an external
vulnerability perspective. The current account and fiscal
deficits are under control, inflation continues to fall, growth
is accelerating and lower crude prices continue to support the
rupee.