Pound to Indian Rupee Exchange Rate Stronger as RBI makes shock rate cut

March 4, 2015 - Written by Ben Hughes

STORY LINK Pound to Indian Rupee Exchange Rate Stronger as RBI makes shock rate cut

The Pound advanced against the Indian Rupee after the Indian Central Bank surprised the markets by making another interest rate cut in an attempt to weaken what it deems an overvalued currency. The action also shows that the central bank is supporting the government’s plans to revive economic growth as inflation falls because of weaker oil prices.

‘The surprise rate cut by the RBI should be a short-term positive for the Indian rupee, as it will support growth-sensitive inflows. Markets are also likely to take the view that the RBI is not overly concerned with the slightly higher fiscal deficit targets for the next two fiscal years announced in the budget last week.

As such, expectations of further rate cuts could build, which would further weigh on the Rupee. At the same time, we expect the RBI to continue its intervention in the foreign exchange markets and aim to contain excessive trade-weighted rupee appreciation,’ said Standard Chartered.

The RBI cut rates by 25 basis points, bring the nations interest rate level to 7.5%. The markets were surprised by the timing of the cut as it occurred just day’s after the Indian government unveiled a budget that will lead to a slower lowering of the fiscal deficit.

‘Given low capacity utilization and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation. Nevertheless, the picture of a steadily recovering appears right,’ said RBI Governor Raghuram Rajan.

India is now just one of many central banks, which are taking aggressive action to devalue their currency in order to try to stimulate economic growth and tackle the threat posed by low inflation and the dangers of deflation. As the global currency war heats up, we can expect to see more rate cuts on the horizon. The European Central Bank is set to launch a quantitative easing programme worth €1.1 trillion on Thursday.

The Pound meanwhile continued to find support despite the release of a softer than forecast Services PMI report. Research group Markit said the services purchasing managers’ index ticked down to 56.7 from 57.2 in January. Economists had expected the index to rise to 57.5.

On the index, a level above 50.0 indicates expansion in the industry, below 50.0 indicates contraction.

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