RBI to cut rates by 25bp on Tuesday

For central banks, managing the different aspects of the leverage cycle is no easy feat. On the one hand, slowing economic momentum argues in favour of further easing. On the other hand, such moves could trigger additional currency depreciation that may in principle be welcomed by exporters, but would add to the cost of servicing FX denominated debt and increase the risk of currency wars. 

"Last week, Taiwan cut rates 25bp and we forecast a similar move from the RBI on Tuesday", says Societe Generale.

RBI Deputy Governor Mundra last week noted that leverage is like blood pressures; it should be neither too high nor too low. In India he warned, corporate leverage is too high and with rising NPAs at banks, transmission of any RBI rate cut to the real economy is likely to be impaired. As recently highlighted by Governor Rajan, in addition to keeping inflation in check, the macroeconomic priority for the short term is to "work with the Government and banks on speeding up the resolution of distressed projects and cleaning up bank balance sheets". Like many of his central bank colleagues, Governor Rajan also highlighted the importance of structural reform. 

The observations above on India echo the broader concern that monetary policy no longer carries the same punch in the emerging economies and this at a time when transmission in the advanced economies is still running at slow speed. 

"In the long hard grind of slower growth that we see ahead, we continue to view structural reform as the main hope (be it for emerging or advanced economies). The "Make in India" strategy offers many good ideas, but as detailed by Chief India Economist, Kunal Kundu in his latest thematic, our concern remains that reform efforts are still coming all too slowly", notes Societe Generale.