NEW DELHI: With China’s economic woes engulfing the world economy , the Centre has swung into action. PM Narendra Modi is expected to seek the advice of economists and businessmen at a brainstorming session over the weekend to work out a roadmap to strengthen India against any possible turbulence and look at ways to position it as a beneficiary of the slowdown in the world’s second largest economy.
The PM discussed the issue with his top economic team on Monday after Indian markets were battered, with the sensex witnessing its worst single-day fall. Modi asked finance minister Arun Jaitley to calm nerves and send the message that India was better prepared to deal with any eventuality . On Tuesday , Jaitley said that the crisis should be converted into an “opportunity” to grow by speeding up reforms.
Sources told TOI the PM had a detailed consultation on the state of the economy , where the issue of high interest rates was also discussed. China’s booster shot to its markets in the form of a 25-basis-point interest rate cut coupled with a 50 basis-point reduction in re serve requirement helped the rupee post its biggest gain against the dollar in 2015.
The domestic currency closed at 66.10 against the greenback -55 paise stronger than its previous close of 66.65. The rupee opened marginally stronger at 66.55 and gained ground on the back o a recovery in stock markets Following news of China’s monetary easing, the loca unit gained sharply to 65.86 before closing at 66.10. The ru pee had fallen by a massive 82 paise on Monday in sync with the rest of emerging market currencies following a rout in the Chinese markets. On Tuesday , the recovery was on the back of the rate cut by the world’s second largest economy which was expected to give a boost to the region.
“After devaluing its domestic currency in a bid to shore up exports, China has deployed interest rate ammo by cutting both its key policy rate as well as reserve requirement ratio. With an aim to channelize banking lending to support real economy , China’s policy actions create scope for synchronous rate cuts in the region, in a bid to stimulate growth in the nexus of emerging market economies,” said Rana Kapoor, MD & CEO, Yes Bank.
Aiding the recovery , which had led market men to describe the day as Turnaround Tuesday , was an expectation that the market rout has removed a rate hike from the Fed’s agenda.
China’s rate cut will put the RBI in a dilemma on policy rates. Information released by the RBI on Tuesday show that four of seven members in the central bank’s technical advisory committee had recommended a rate cut in its August policy review. The RBI is not bound to go by the recommendation of the TAC. Rajan had held that interest rates had to be a function of domestic inflation and reflect a longer term view rather than an immediate reaction to inflation. China’s rate cut will put pressure on the RBI to cut rates as the move will impact trade and capital flows.
“With global economy still languishing with the exception of some pockets, EMEs need to make some strong decisions, albeit swiftly. With India’s macros looking resilient, the RBI must add to the 75 bps quantum of rate cuts already announced in 2015, carefully balancing low inflation with growth upside,” said Kapoor.