Attacks and fall in inflation could hasten rate cut by the RBI

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Mumbai: The deadly attacks in India’s financial heartland struck when the economy was already vulnerable from the global credit crisis, so could hurry the central bank into cutting interest rates again to bolster investor confidence.

Analysts said the terrorist assault will further undermine sentiment and worry the central bank, which has seen the main Bombay Stock Exchange index drop more than 50% this year and the rupee shed a fifth of its value as the global financial storm hit India.

Some economists said the central bank could be tempted to cut rates by a full percentage point soon. That would bring the benchmark repo rate down to 6.5%, the lowest since June 2006.

“I think this will accelerate the process of monetary easing. Large terror attacks of this kind lead to a huge problem in the money market,” said Abheek Barua, chief economist at HDFC Bank, in New Delhi. “The fact that this was explicitly focused on foreign nationals including those on business, sends a different kind of message altogether. This kind of thing can do damage to sentiment both in terms of foreign institutional investment and foreign direct investment and add to the slowdown in the economy,” Barua said.

Inaction by the central bank could prove damaging for financial markets. “If they don’t cut, capital flight will likely pick up momentum,” said Suresh Ramanathan, regional FX and rates strategist with CIMB investment bank in Kuala Lumpur.

A fall in inflation to six-month lows also favours a rate cut, the analysts said. India’s wholesale price inflation has come off a peak of 12.9% in August.

The latest weekly reading on Thursday though saw the wholesale price index up 8.84% in the year to November 15, easing from the prior week’s 8.9% rate and the lowest level since May.