Friday, January 25, 2008

Should RBI cut rates?

In continuation of the discussion on RBI cutting rates, the situation has changed because the US Fed cut rates. One unexpectedly large rate cut of 75 bps has taken place. What is more, the derivatives market suggests that more rate cuts are in store. Look at these probabilities:

This influences monetary policy in India and China. In both cases, pegged exchange rates induce a loss of monetary policy autonomy. Upholding the exchange rate peg will require cutting rates. In India's case, there is a large interest rate differential that (in any case) needed narrowing. See an edit in Indian Express and Omkar Goswami in Business Standard. In the Chinese case, the game of sterilised intervention - which used to be profitable since local Chinese rates were lower than the return on US treasuries - is now starting to cost serious money.

So expect moves in monetary policy amongst the peggers (though not the floaters, who have monetary policy autonomy) in response to the decisions of the US Fed. News begets news and volatility clusters.

3 comments:

  1. Looks like an interesting graph where did you get it from. I would like to see the legend.

    Patel

    ReplyDelete
  2. hi...now that the policy announcement has happened i don't think there is any point in debating what will happen but still i am not very clear on why RBI did not go ahead with a rate cut...onething thts obvious is RBI is still worried abt the inflation levels...which mite hike up in case petrol prices don't flatten out which i don't really have a clear view on...but then isn't this kind of counterproductive if i look at it in ref to the restrictions put on investments thru PN..at one point we are tryin to restrict hot money and on the other hand not doin anythin abt the int rate differential...and even whn INR is appreciatin heavily we are still maintaining the same grwth projections..so is it rite to assume that exports are nt getting hit significantly..which i doubt is the case...i think i am slitly confused abt the approach or stance RBI is taking!

    ReplyDelete

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