Trade Tensions Push RBI and BOT to Cut Rates

Stockholm (Ekonamik) – This week saw central banks in India and Thailand cut their policy rates. The Reserve Bank of India (RBI) announced it had decided to cut its main policy repo rate by 35bps this week. Although the rate cut decision was unanimous, four monetary policy committee (MPC) members voted to cut rates by 35bps while two other members voted to only lower rates by 25bps instead.  Further East, the Bank of Thailand (BOT) also lowered rates by 25bps to 1.5%. The decision was not unanimous and two MPC members voted to keep rates at their previous level.

India Meets Expectations

“In reviewing global developments, the MPC noted that global economic activity has slowed down since its meeting in June in an environment rendered hostile by elevated trade tensions and geo-political uncertainty,” explained RBI Governor Shaktikanta Das. “Reflecting subdued demand conditions, crude oil prices have fallen sharply since mid-May. On the other hand, gold prices have risen, propelled by increased safe haven demand. These developments exemplify the high uncertainty weighing on the outlook, amidst rising downside risks to growth. Increasingly, central banks across the world are easing monetary policy, including through ‘insurance’ rate reductions, and are committing to maintaining accommodation in their policy stances.”

The decision was anticipated by the State Bank of India’s (SBI) research desk. “We now believe that RBI should cut repo rate by 25 bps in the 07 Aug policy and further reduce it by 50 -75 bps to achieve the level of <= 5% by Mar’20,” noted the team led by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI. “We however foresee significant volatility in g-sec yields that could first rise precipitously (even 6.5-6.6% is not ruled out) and then decline precipitously (below 6%), reflecting global headwinds. Banks will cut deposit rates further and lending rates will witness a faster incremental fall in coming months. This could aid recovery, but it is unlikely before late Q3FY20”

Thailand Surprises

“In deliberating their policy decision, the Committee assessed that the Thai economy would expand at a lower rate than previously assessed due to a contraction in merchandise exports, which started to affect domestic demand. Inflation was projected to be lower than the lower bound of the inflation target,” explained the Titanun Mallikamas, BOT’s MPC Secretary. “The Committee would monitor external risks from intensifying trade tensions, the economic outlook of China and advanced economies that could affect domestic demand, as well as geopolitical risks.” Other concerns included high household debt and the potential that the government’s expansionary fiscal policy could crowd out private investment.

“BOT surprised market by cutting policy rate 25 bps from 1.75 to 1.50%,” commented Siam Commercial Bank’s (SCB) Economic Intelligence Centre on August 8. “5Y IRS traded lower around 8 bps while 2YIRS lower by 8 to 10 bps. On Bond side, we have seen some continued buying interest from offshore investors after the meeting as the market would price more cuts from BOT.”


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