Barclays sees India frontloading rate cuts before Fed disruption

Barclays Plc and Deutsche Bank AG predict India's central bank Governor Raghuram Rajan will frontload interest-rate cuts, anticipating market swings once the Federal Reserve starts raising borrowing costs.

Barclays sees a 25 basis point reduction in the next quarter and a pause after that, while Deutsche Bank forecasts a halt by mid-2015 after a decrease of 50 basis points. Rajan has lowered the benchmark twice this year to 7.50 per cent, helping curb the rupee's gains to 1.2 per cent, still Asia's best performance.

The strengthening dollar and normalisation of US monetary policy poses a challenge for India's economy, International Monetary Fund Chief Christine Lagarde said on March 17. Rajan said the following day that India is much better prepared to face volatility from higher US rates, which make it more attractive to invest in the world's biggest economy.

"Rajan's frontloading of rate cuts is influenced by faster-than-expected disinflation and being cautious to avoid the potential volatility on the way later this year when the Fed starts raising," Siddhartha Sanyal, chief India economist in Mumbai at Barclays, said in a phone interview. "There's still a bit of a time for the Fed rate hikes to start. All these factors are giving Rajan a window to ease."

Rajan cut the repo rate 25 basis points on March 4 in this year's second unscheduled move as consumer prices held below the central bank's 6 per cent target for January 2016.

The decision came within days of Prime Minister Narendra Modi's government pledging to cut the fiscal deficit to an eight-year low. Economists at banks including Goldman Sachs Group Inc. had anticipated a pause until the next meeting on April 7.

Global funds, which poured a record $42 billion into Indian stocks and bonds in 2014, have boosted holdings by another $11.9 billion this year. The rupee delivered 3 percent total returns in 2015, second only to the Russian ruble.

Besides easing policy, the Reserve Bank of India has also been mopping up U.S. dollars from the spot market to curb the rupee's gains, taking foreign-exchange reserves to an unprecedented $338 billion last month. The RBI's net currency purchases in the spot market reached a seven-year high of $12.1 billion in January, data compiled by Bloomberg show.

India's foreign exchange reserves and fiscal position make it better prepared for the Fed, Rajan said March 18. That was before U.S. central bank officials concluded a two-day meeting and signaled they will go slow as they start increasing rates.