In the space of less than a week, two major economies in Asia have unexpectedly cut their policy rates. The first was China, which cut its benchmark rate at the end of February, while India followed suit with a 25 basis point cut in the policy repo rate on March 4.
Of the two, India's rate cut is perhaps the most surprising, with it being the second since mid-January and having taken place outside scheduled policy meetings.
With that in mind, Citywire Asia asked industry experts on what they are making of this seemingly sudden monetary policy action and what it means for equity and bond markets.
Prashant Khemka, Goldman Sachs Asset Management
Citywire AAA-rated manager of the Goldman Sachs India Equity fund
The 25-basis point rate cut was broadly expected but the timing took many by surprise, as the Reserve Bank of India decided to act outside the policy review timetable.
With the next bi-monthly rates policy statement not due until April 7, the need to support certain weak sectors of the economy, the global trend towards easing and the already-agreed framework on monetary policy all conspired to make this move necessary ahead of the April meeting. This further easing in rates bears out our positive outlook on Indian equities for the year ahead.
In addition to the RBI’s existing commitment to monetary easing, we base this on the cyclical recovery evidenced by an improvement in GDP growth this fiscal year; a positive external environment driven by factors such as continuing low oil prices, which act in support of consumer spending; and the proactive Modi government, whose structural reforms are boosting competitiveness.
For these reasons we believe consensus views underestimate the upside potential in the Indian equity market and we anticipate both improved valuations and earnings growth.
We expect margins to return to historical averages and earnings growth to accelerate from the subdued high single-digit levels of the past three years to around 20%, set against a long-term average in the mid-teens.
Avinash Vazirani, Jupiter
Manager of Jupiter JGF India Select fund
Markets may have been caught by surprise by the Reserve Bank of India’s (RBI) decision to cut its key policy interest rate, but we believe it simply marks another step on the route that should see the central bank reduce rates by much more than the markets are expecting over the course of the next few quarters.
The rate cut is welcome as it should provide a further boost to the economy, just days after India’s Finance Minister Arun Jaitley forecast GDP growth of 8-8.5% for 2015, and double-digit increases in subsequent years.
It also signals, in our view, that the RBI is comfortable that inflation remains in control and in line with its view that it will continue falling for the remainder of this year and into the first half of 2016. The bank’s target is to bring the inflation rate to 4% by the end of a two-year period starting in fiscal year 2016-17.
We believe the most obvious beneficiaries of this latest interest rate cut are likely to be public sector banks like Canara or Oriental Bank of Commerce, which may see the value of their investment book boosted as a result of lower 10-year government bond yields.
Also, with private sector banks with a significant share of deposits from the wholesale market like Yes Bank or IndusInd, and non-banking financial companies that have a higher reliance on bank borrowing like Dewan Housing Finance and Repco Home Finance. In the medium term, a lower interest rate environment is likely to help to revive the investment cycle and boost investment in infrastructure.
Nicolo Carpaneda, M&G Investments
The rate cut was completely unexpected. I do not think the RBI will have room to ease much more. There is no doubt that India is in a fantastic position right now as opposed to a few years ago, when it was troubled by high oil and food subsidies, high inflation and low growth.
Now, there is very good support from oil, structural reform prospects, a Modi budget that has some good initiatives, including the Made in India initiative. I think the RBI is doing its part in trying to stimulate the economy, which should work well in this environment.
However, the problem is that the more you ease, the faster inflation will catch up when the oil price stops falling. We need to assess the long term impact of these steps; aggressive easing today could lead to trouble tomorrow.