The Reserve Bank of India has cut rates for the third time this year. The move by the central bank was an attempt to further stimulate the Indian economy as investor expectations run ahead of the real economy.
The key repo rate was cut by 25 basis points to 7.25%. Previous moves this year came in January and March where the rates were cut by a similar amounts.
Indian stock markets have been strong over the last twelve months as investor’s price in stronger growth. The GDP growth rate has jumped but there are still concerns that this hasn’t yet filtered down into corporate earnings.
The upcoming monsoon also adds to market participant’s worries and many had expected the rate cut by the central bank to provide some stability.
“A repo rate cut of 25 bps was expected and already factored in by most of the market participants. It’s consistent with the RBI’s cautious stance, as it remains concerned about the monsoon outcome, geopolitical trends & U.S. Fed action. RBI’s future actions will be governed by not just the above stated points but also the government’s fiscal responses to adverse monsoon outcome and its efforts to push infrastructure growth.” Said Rupa Rege Nitsure, Chief Economist at L&T Financial
Although growth in India hit 7.5% in the last quarter, weak manufacturing data in April gives early indications that the headline growth rate may drop going forward, further dampening the prospect of stronger corporate earnings investors long for.