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  • Emerging Markets Debt Daily

    India’s Rate Cut Looks Rushed

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 07, 2019

    India’s surprising policy rate cut raises concerns that the central bank is moving too far ahead of the curve. Mexico’s central bank should feel under less pressure to maintain a very tight policy stance following today’s inflation releases.

    India’s unexpected interest rate cut (25bps to 6.25%) – made by central bank Governor Shaktikanta Das at his first policy meeting – raises questions about the central bank’s intentions. Official reasons – lower inflation and the wider output gap – would certainly justify a shift in the Reserve Bank of India’s (RBI’s) stance from “calibrated tightening” to “neutral”. However, many commentators felt the rate cut was rushed, given India’s fiscal realities, volatile oil prices, and the proximity of the elections. A greater emphasis on growth (rather than inflation) and the governor’s remarks about price stability (rather than anchoring inflation expectations) reinforced the feeling that the RBI may be moving too fast ahead of the curve.

    Mexico’s latest inflation prints should give the central bank some peace of mind when it holds its policy-setting meeting this afternoon. Both headline and core inflation undershot consensus in January, easing to 4.37% and 3.6% year-on-year, respectively (see chart below). As headline inflation moves closer to the target band and domestic demand remains soft, there are fewer reasons for the central bank to maintain such a high real policy rate (3.7%). The market agrees, pricing in 41bps of cuts in the next 12 months.

    The horror story of the day comes from Turkey, where a seemingly nice cash budget surplus (TRY2.5B in January) masked a massive jump in primary spending and the central bank’s earlier than expected dividend payment to Treasury.  There are nagging concerns that we will see more of this in the run up to the local elections. The central bank would be wise to stay on hold until the situation normalizes, albeit there is a risk that it might come under political pressure yet again.


    Chart at a Glance

    Mexico Inflation, % year on year

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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