The low inflation environment is giving the Reserve Bank of India (RBI) room to cut interest rates and this should encourage investment and push up economic growth, according to Moody’s Analytics.
“…Falling fuel and power costs have more than offset higher food inflation. Core inflation is also weak, however, suggesting that the economy is growing below its potential rate,” said the analytics arm of Moody’s Corporation.
Referring to the fact that monetary policy settings have been eased in 23 economies so far in 2015, the analytics firm observed that “India was the first cab off the rank, cutting the policy rate in mid-January by 25 basis points to 7.75 per cent because of the lower inflation outlook. It followed with another cut of the same magnitude in March.”
In Asia, eight central banks have acted at least once this year mostly because of the lower inflation outlook, driven by a 50 per cent fall in global energy prices over the past year.
Soumya Kanti Ghosh, Chief Economic Advisor, State Bank of India, in a report, said it is likely that the RBI may wait and watch for the next rate cut, but will still frontload it in the April-June 2015 quarter on the back of a possible Fed rate hike between June to September.
John Lonski, Chief Economist, Moody’s Capital Markets Research, said conceivably, dollar exchange rate appreciation might substitute for a Fed funds rate hike.
“All else the same, the need for a higher Fed funds rate recedes as the dollar exchange rate strengthens. A persistently strong dollar is likely to weaken the pricing power of US businesses and labour,” he said in the Moody’s weekly market outlook report.