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India: RBI spooked markets by 50 bps cut - TDS

FXStreet (Delhi) – Paul Fage, Senior Emerging Markets Strategist at TD Securities, notes that the Reserve Bank of India (RBI) cut the policy repo rate by 50bps to 6.75% while the consensus had expected just a 25 bps cut.

Key Quotes

“The principal reason given for cutting rates was the improving inflation outlook. The RBI forecasts inflation at 5.8% by January 2016 and 4.8% by Q1 2017.”

“The 50 bps cut reflects the view of the RBI that, with inflation under control and the output gap negative, rates should be cut as much and as quickly as possible.”

“The fact that today’s rate cut is described as “front-loaded” and that the RBI says its focus is now on improving the transmission of rate cuts through to bank lending rates all suggest that the RBI will probably not cut again this year. We still expect a 25 bps cut at the February meeting next year.”

“The RBI announced other measures today aiming at deepening Indian capital markets as well as increasing foreign participation in them. In particular, the limits for FPI (foreign portfolio investors) investment in government securities will be increased.”

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