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RBS’s Kapur Says India May Cut Rates by Quarter Point in July

Gaurav Kapur, senior economist at Royal Bank of Scotland, comments on the outlook for India’s interest rates after the Reserve Bank of India unexpectedly kept the repurchase rate unchanged today. Kapur was among the four economists out of 25 surveyed by Bloomberg News that predicted the outcome. Nineteen expected a 0.25 percentage-point cut and the remainder a half-point reduction. The next scheduled meeting is on July 31.

Inflation Focus:

“The RBI rate action does not come as a surprise as the case for a rate cut was not a straightforward one given the upside risk to already high inflation. The central bank has once again reiterated its focus on inflation for the time being, and perhaps has recognized the limited ability of monetary policy to prop up growth, especially considering that the investment slowdown is not necessarily interest-rate driven.

July Review:

‘‘That said, in the July policy meeting the RBI will take a more sympathetic approach towards growth and cut the repo rate by 25 basis points. For liquidity infusions, the RBI seems to prefer open-market purchases of bonds at this stage rather than a reduction in lenders’ cash-reserve requirements.’’

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