India got a surprise interest rate cut overnight and investors are enjoying it: Stocks are up 2.5% as of 8:30 a.m.
Inflation is down to just 5% in India, and that’s given the central bank the confidence to cut rates. That figure sounds pretty high by the standards of developed economies, but it’s down from 7.5% at the start of 2014 and over 10% for much of 2013.
Raghuram Rajan, governor of the Reserve Bank of India announced a cut in the main interest rate from 8% to 7.75%, the first cut in more than a year and a half.
The jump in equities today is adding to the general surge that’s been seen in India over the last 12 months: the Sensex stock index is up by more than 8,000 points, a 42% climb, making it one of the best-performing in the world. A lot of that rise came in Spring, when right-wing reformer Narendra Modi was elected as Prime Minister in a landslide victory.
Morgan Stanley’s Chetan Ahya thinks this isn’t the last of rate cuts from the Reserve Bank of India. In a note emailed out earlier, he said: “We believe that this is a beginning of a big rate cut cycle. We expect a further 125 bps (1.25 percentage points) over the next 12 months, cumulative 150bps in this cycle”.
If he’s right, that would bring interest rates to just 6.5%, the lowest for several years in India, and would probably give the Sensex more joy along the way.
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