India "Surprises" 51 Out Of 52 "Experts", Slashes Rates More Than Expected As Easing Bonanza Continues

Tyler Durden's picture

Late last month, we asked how long it would be before the RBI hit back in the wake of China’s yuan deval.

The Indian government’s chief economic advisor Arvind Subramanian had just told ET Now television that India may need to "respond" to China’s monetary policy stance, and also hinted at further export weakness. It wasn’t hard to read between the lines: more shots were about to the be fired in the ongoing global currency wars.

Reinforcing that contention was the following from Deutsche Bank:

India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports. 

Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view. 



Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.


And here's what Citi had to offer:

The likelihood of a rate cut at the RBI policy review on September 29 has risen given the downside surprise from July CPI inflation and the disinflationary impulse from the continued slide in commodity prices. But market pricing does not seem too far from that outcome. 1y ND-OIS is pricing in about 80% probability of a 25bp rate cut in September (and unchanged rates thereafter). 

So while the writing was on the wall for a rate cut, the degree to which the RBI is concerned was apparently lost on most economists and while RBI Governor Raghuram Rajan has a reputation for keeping forecasters guessing, it's nevertheless notable that only 1 out of 52 had predicted the 50bps cut that came on Tuesday. As noted earlier this morning, here's what happened after the announcement: 

The announcement catalyzed a dramatic move in the all important USDJPY, which after sliding to a low of 119.250 overnight just after the RBI surprise announcement, started its usual dramatic levitation to the 120 "tractor" point, and around 5am Eastern, the latest central bank intervention to stabilize the market selloff succeeded, with the key carry pair trading within a fraction of the magical support level that is so instrumental to keep stocks bid.

Apparently, the global rout in commodity prices has given Rajan more room to ease via imported deflation. Here's Goldman's summary:

The Reserve Bank of India (RBI) cut the policy repo rate by 50bps to 6.75%. This was ahead of market expectations of a 25bps cut, and our expectation of a hold. The Cash Reserve Ratio (CRR) remains at 4.00%.



The RBI reduced its GDP growth target to 7.4% from 7.6% for FY16. It mentioned that underlying activity remains weak on account of a sustained decline in exports, rainfall deficiency, and weaker than expected momentum in industrial production and investment activity.


The RBI released its CPI forecasts for FY17, and suggests a declining path for inflation. While the CPI forecast for January, 2016 is at 5.8%, only a shade lower than its August projection of 6%, the CPI forecast for early 2017 has been given as 4.8%. This suggests that the RBI expects inflationary pressures to continue to come off over the next 18 months, despite GDP growth accelerating from 7.4% in FY16 to 8% by Q4, FY17. The basis for the larger-than-expected rate cut seems to be this decline in the new CPI forecast for FY17.


In justifying its aggressive rate cut, the RBI mentioned a number of reasons. According to the RBI, despite the monsoon deficiency, food inflation pressures have been contained due to resolute actions by the government to manage supply. The RBI think that, looking forward, subdued international food price inflation should continue to put downward pressure on domestic food prices. Finally, given weakness in global activity, and still-low industrial capacity utilization, ‘more domestic demand is needed to substitute for weakening global demand’. The RBI has reduced its assumption for oil prices to US$50 a barrel instead of US$ 60-63 in its April projections.


The aggressive rate cut by the RBI has come as a big surprise to us. We think that there was a clear change in the RBI’s stance, from the hitherto hawkish tone on inflation. While meeting the January, 2016 inflation target of 6% was not in doubt, we think that the RBI’s inflation projections for FY17 are optimistic, given risks to food prices, an impending civil service wage hike, high inflation expectations, and a narrowing output gap. The language was also markedly different from the August policy statement, where the RBI was awaiting greater transmission of its front-loaded past actions. Despite no further transmission having occurred, the RBI has ‘front-loaded’ policy action by reducing the policy rate by a further 50bps. Since the market was pricing in 25bps of rate cuts, we think the RBI’s action is essentially to get ahead of market expectations, and use the window available before the Fed starts hiking rates. While the language is dovish, given the aggressive front-loading, and the optimistic inflation projections, there would need to be very significant downside surprises on headline inflation from its projections for the RBI to cut rates again, in our view.

In other words, Goldman seems to think that the RBI may now be out of ammunition unless inflation surprises markedly to the downside. As Bloomberg notes, we'll now see whether the central bank can succeed in fixing a transmission mechanims that seems to be impaired by banks' concerns over souring loans. Of course the other thing to note here is that India is a major emerging economy and Rajan's move to lean dovish means that if the FOMC does hike, the policy divergence between the Fed and the RBI will be that much greater, which could accelerate capital outflows.

In any event, another day, another rate cut as the global currency wars continue unabated. We'll close with something Rajan said last month as it seems particularly amusing in light of today's move:

"Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading."


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buzzsaw99's picture

...merchandise exports contracting yet again in July by 10.3% yoy.

Holy crap!

chubbar's picture

I wonder when it's going to dawn on these rocket scientists that not every country can be a net exporter unless we are trading off planet? Perhaps it's time to come up with a new plan instead of currency wars?

Dubaibanker's picture

That's nothing....Indian exports have plunged for 9 straight months....

August exports shrink for ninth straight month, fall 20.7%

Bankers expect NPA crisis to worsen in next few years: EY survey
Jethro's picture

HARPEX continues to slide. We never really recovered from 2008. BTI usually gets a bump from Sep to Nov, but it's really not doing all that well now either.

venturen's picture

We are watching the world implode into the Krugman Zero Rate Singularaity. Japan has set the model of 20 years of zero growth with zero interest rates and we took the bait. It will be fun to see Krugman as the worlds most hated economists for the remainder of future. 


Krugman likes cats, and only the dog people will truly hate him forever. Cat people are not truly detestable IMHO, but he is a shill, and a very bad Economist, I must agree.

Jeffersonian Liberal's picture

For those of you who thought Modi was going to bring real change to India, you should have known that he was just another puppet when he didn't propose any practical reisstance to the central banks.

This latest central manipulation of monetary policy should be all the proof you need that he is just another CB blowup doll.

Let the markets control monetary policy.

FlacoGee's picture

One only needs to look at the long history of India to know there is no "change" coming.

This applies to all of the BRICs.

I used to puke in my mouth everytime I heard "BRICS"...  "Brazil has changed"

Brazil, India, South Africa (post Appartheid), etc. will never change.

The headlines of 20 years ago, are the headlines of today, and will be the headlines in another 20 years.



gatorengineer's picture

Maybe we should let them Bomb Isis too and sit at the big boy table?  would that help?

venturen's picture

too busy bombing the pakis

Jethro's picture

Setting the Sikhs loose on the Muslims isn't a bad idea actually. If you knew about all the bullshit the muslims did to them in the past, you'd see what an asset they could be in that venture.

The Count's picture

Brazil is the country of the future and will always be!

The Count's picture

Next on the playlist: negative interest rates. the only options left are bad ones. look at europe, the are risking the entire social structure just to buy (so they were led to believe) some gdp 'growth' via the uncontrolled masses of asylum seekers.


chubbar's picture

So the good news about that strategy is that when the economy does collapse they have millions of un-assimilated folks looking for more handouts which is sure to add to the cohesiveness  of whatever is left of the social structure. /S

The Count's picture

Exactly, but Merkl is either way to stupid to understand any of this, or more likely, she is but a mere puppet of the int. banking cartels.

Jeffersonian Liberal's picture


We should start a dead pool on the order of the bad options the CBers will take. I say negative interest rates and then the nationalization of all private retirement accounts (including 401Ks -- the fair-haired child of all those investment pimps who keep giving stay-in-the-market lectures in conference rooms throughout Corp. America).

If you want to see those pimp heads explode, ask in front of all the employees how you can use your retirement set-asides to get out of the market in order to purchase physical gold and silver.

Jethro's picture

I've done that in one of our 401k meetings before. They didn't seem to appreciate my viewpoint.

gatorengineer's picture

Seriously What the Fuck does India export other than Indians?

chubbar's picture

Give Dell computers a ring for some tech support, that ought to answer your question.

gatorengineer's picture

I wouldnt have thought a call center was an export....

Memedada's picture

Export = goods plus services. Or basically anything that is officially bought by someone outside the arbitrary border of a country.


nosam's picture

Quite a bit actually. About $300 billion worth of goods and $200 billion of software and other services.

venturen's picture

ha ha....they export...refined oil.  which is 1/3 of what they import? and medicine which was developed in the US and whose profits are offshored there, jewels which are actually imported and polished, ....they export very little beyond a little rice and some cars. Number 6 export is vegitable sap what ever that is?  That $200 billion in software isn't one of those apple, oracle, google IP scams?

Jethro's picture

If shipping continues to decline, maybe the unused freighters can be disassembled on an Indian beach somewhere, and the scrap can be turned into rebar?....and then just sit in a storage yard somewhere.

Seasmoke's picture

So every Central Bank is dropping , except the Federal Reserve, who will be raising any month now.......  hmm, seems like its almost coordinated and planned. 

venturen's picture

raising? They will be "raising" QE4 banker bonus insurance program soon, very soon. Raising rates highly unlikely. When you have criminal bankers crying that we can't raise rates while they become billionaires and they are listen have a large problem

Jeffersonian Liberal's picture

They are all playing Crack the Whip on very thin ice. Currently, the Federal Reserve is the anchor.

They will all crash through the ice when TPTB determine that the time is ripe to implement globally managed fascism.

venturen's picture

why would anyone be surprised? We are in a death spiral of rates cuts by gutless dunces! 

youngman's picture

They make a car and several small motorcycles..and yes Curry...but this should be good for gold...lever up boys and buy that gold shirt...if ya know what i mean

Jethro's picture

Biflation will really fuck India good. About a quarter of their earnings go to pay for food, and if food prices spike, there will be riots everywhere.

TAALR Swift's picture

Do you know where that middle finger has been, that he is sniffing?