INDIA’S MONETARY POLICY

WHY INDIA SHOULD NOT FOLLOW CHINA IN CUTTING RATES

Money Control, June 11, 2013

After a surprise interest rate cut by China, all eyes are now on another Asian economic powerhouse, India, which is also expected to cut rates to boost flagging growth when its central bank meets in over a week`s time.

But one expert warns against such monetary easing as it would fan inflation, which shows little sign of decelerating in India.

"Inflation risks are still high. The Reserve Bank of India can risk raising inflation (further) by cutting rates, when prices are (already) at an elevated level," Taimur Baig, Chief Economist, Global Markets Research at Deutsche Bank wrote in a note titled `RBI Should Not Be Cutting Rates on June 18, But Would It Anyway?`

The market consensus is for a 25-50 basis point rate cut on top of April`s 0.5% cut as economic growth slowed to a nine-year low of 5.3% in the first quarter of the year.

In contrast, China`s economy slowed in the first quarter to 8.1% and it`s inflation rate has also eased, falling to 3.4% in April. But slowing GDP expansion in India has had little impact on reining in prices.

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