RBI rate cut benefits Rupee

Published by Metro India News on October 12, 2015 00:14:48 AM

Reserve Bank's decision to cut interest rates once again in 2015, this time by 0.5 per cent to 6.75 per cent, has benefited the Indian Rupee (INR). Although another interest rate cut was regularly threatened by the Reserve Bank of India (RBI), no one expected the move to be a cut of another 50 basis points. The reason for the gain in the local currency despite another interest rate cut, which should really weigh on capital outflows, is that there are probably some domestic suspicions that the RBI should be finished with monetary easing this year.

After hitting a fresh two-year low just a month ago, the INR has steadily appreciated against the US Dollar (USD) moving from 65.4912 to 64.8847. There's the other side of the coin to remember as well. The USD is tumbling against the INR and other currencies, falling over the weaker Non-Farm Payroll (NFP) numbers for September and the weakening expectations from traders that the Federal Reserve will not raise US interest rates by the end of the year.

There is a general feeling that the Federal Reserve missed the boat to raise US interest rates in 2015, because September would have been the appropriate time to begin raising interest rates. Over the next fortnight, the INR could sustain its stronger position against the USD, backed by the RBI's commitment towards an accommodative monetary policy. However, there are twin threats to the currency's stronger trend, those being the economic slowdown in China, and India's own fluctuating GDP growth.

The IMF has just cut its forecast for India's GDP from 7.5 per cent to 7.3 per cent. Which forecast will prevail by the end of the year, the government's 7.6 per cent, the IMF's 7.3 per cent or the RBI's 7.4 per cent? A lot depends on investment levels. India's economy has received a vote of confidence from Germany, which has just signed a raft of bilateral agreements with the government, with the added promise of 2.25 billion Euros-worth of investments in solar energy.

-Jameel Ahmad,

Chief Market Analyst, FXTM