This is what will determine India’s next move

The Reserve Bank of India cut rates to their lowest level since early 2011.

Governor Raghuram Rajan lowered the key interest rate by 25 basis points to 6.50%, as was expected by most economists, according to a statement from the bank on Tuesday.

This was the first cut in six months, but the fifth since the beginning of 2015.

In a statement that accompanied the decision, the Rajan-led
bank suggested that “monetary policy will remain accommodative.”

“The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up,” it added.

Reserve bank india

The RBI also noted that it expected CPI inflation to moderate to 5% by March 2017.

However, it cited risks to inflation such as oil prices, the civil servant pay hike, and adverse weather conditions.

Ultimately, according to a team of Morgan Stanley analysts, the big takeaway here is that India’s next move will likely be dependent on what happens with inflation.

The “magnitude of easing [will] be dependent on [the] inflation outcome,” a Morgan Stanley team led by Upasana Chachra wrote in a note to clients after the announcement.

“We maintain our view that inflation will be sustainably lower at 4.75% YoY in QE Mar-17. Based on our inflation forecast and the RBI’s stated real rates target of 1.5-2.0%, we see the possibility for rate cuts of another 25 basis points in 2016,” they wrote.

“However, if normal weather conditions in the critical monsoon rainfall season (Jun-Sep period) bring food inflation lower, it would open up room for additional easing,” they added.

The Indian rupee is weaker by 0.7% to 66.558 against the dollar as of 12:36 p.m. ET.

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