All Eyes on RBI as Global Central Banks Cut Rates

Central banks in China, Britain and Europe have wielded monetary levers to stimulate their economies, raising hopes the Reserve Bank of India (RBI) could do the same at home soon. But experts said Governor D Subbarao would wait to see inflation cool before obliging with a rate cut. In a span of 45 minutes on Thursday, the European Central Bank and People's Bank of China cut their benchmark borrowing costs and the Bank of England raised the size of its asset-purchase programme. Their actions came two weeks after the US Federal Reserve expanded a programme lengthening the maturity of bonds it holds. Fed Chairman Ben Bernanke has indicated that more measures will be taken if needed. While ECB chief Mario Draghi denied it was a co-ordinated move, investors saw it as some form of a concerted action — of the kind adopted by global central banks to prevent markets from seizing up after the Lehman Brothers bankruptcy in 2008. Stocks tumbled, fearing a worsening economic climate while safe-haven assets such as US and German bonds rose. Crude oil and commodities rallied since easy monetary conditions could stoke inflation.  "The actions had the look and feel of a co-ordinated global easing campaign," said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. "The central banks are trying to arrest the synchronised slowdown in global economic growth that has taken shape," Kounis was quoted as saying by Bloomberg News.  Policymakers across the world are reacting as Europe's debt crisis persists, hiring slows and emerging markets soften. But no one is quite certain whether this fresh dose of monetary medicine will work five years after central banks began to administer it to battle the financial crisis, or if more will be needed.  The Bank of England was the first off the block, announcing it would restart buying bonds two months after a halt as it tries to pull its economy from recession. It raised its assetpurchase target by £50 billion ($78 billion) to £375 billion. Within a minute of that decision, the People's Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective Friday. Banks have been allowed to offer loans at up to 30% discount to benchmark rates.  This was followed by the ECB, which cut its main rate by 25 basis points to a record low of 0.75% and said it will no longer pay anything on overnight deposits. RBI may not Follow Suit  The ECB move is part of its attempts to prevent the sovereign debt turmoil from driving the 17-nation euro economy into recession.  But in India, the feeling among experts was that such actions would not necessarily persuade RBI to follow suit, although many believe it could cut rates by 25 basis points at its next meeting on July 31 if the government demonstrated some action to reduce its fiscal deficit once the presidential elections are over.  "Actions in China and Europe are not going to impact the RBI's view on inflation," said Arun Srinivasan, a fixed income fund manager at ICICI Prudential Life Insurance. "Those economies are addressing slowdown and recession. The governor has said he would do everything to tackle inflation."  India's inflation measured by the wholesale price index (WPI) is at 7.6% while consumer price inflation is around 10%. The central bank fears that if prices of controlled articles, notably fuel, are raised, inflation would rise further. A poor monsoon could also drown hopes of an early interest rate cut as poor rains could hit agricultural output at a time food prices are climbing. An inkling of the Reserve Bank's thinking came on Wednesday, when the governor suggested that controlling inflation was a priority. "We are sensitive to it (inflation). We are committed in bringing inflation under control. We will continue to make all efforts," Subbarao told reporters in Chennai.