Snapshot - Economics
Fed rate cut spurs EMs into action
A wave of rate cuts across the emerging markets is likely, as India joins Brazil in cutting interest rates by more than expected.
Like Brazil last week, India’s central bank surprised markets with a larger-than-expected cut, easing by 35 bps to take the policy rate to 5.4%. The accompanying statement was also rather dovish in tone and suggested more cuts to come.
This month’s rate cut had been flagged at the previous meeting, the new governor’s first, which also delivered a rate cut.
Why has India cut rates?
While there is undoubtedly a political motivation for easing policy, the macroeconomic backdrop in India also warrants a softer stance at present. The central bank was able to point to weaker demand both globally and domestically, along with softer inflation.
Headline inflation in India remains below the 4% target, and core inflation is weakening. Core inflation excludes food and energy, which can be particularly volatile.
The central bank admits there are upside risks from food prices, particularly due to the effects of a subpar monsoon season on crop yields. But an above-target inflationary surge seems unlikely.
Helpfully, household inflation expectations are declining and corporates expect an easing of output prices. This has allowed the central bank to project inflation remaining in its target range over the next 12 months.
What does this mean for wider emerging markets?
More broadly, the start of Federal Reserve (Fed) easing seems to have been the firing gun for more aggressive easing across emerging markets (EM). We would expect more rate cuts across the region for as long as the Fed retains a dovish stance, particularly given the policy space central banks enjoy in EM.
One risk is the escalation in the trade war and the accompanying weakness in risk assets, including EM currencies. This may make central banks pause, but ultimately we expect ongoing easing from the Fed and elsewhere to spur their EM counterparts on.
You can find more emerging markets insights here.
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.