Fed rate cut spurs EMs into action
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.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and 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. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.