Interest rate cuts will only stoke the economic fires of the world’s fastest growing emerging market, with Canadian investors increasingly positioned to benefit.
The 50 basis points cut in interest rates on September 29 announced by the Reserve Bank of India (RBI) should provide a boost to the Indian economy as well as the bond and equity markets.
“The rate cut is positive for bond prices and will benefit investors in the Excel India Growth & Income Fund,” says Christine Tan, Senior Portfolio Manager with Excel Investment Counsel. “Earnings of companies in the Excel India Fund should also improve due to lower carrying costs, leading to an increase in their prices.”
India’s larger than anticipated rate cut follows three cuts of 25 basis points each earlier this year to sustain growth in the Indian economy.
In making the cut, RBI Governor Raghuram Rajan cited the need for more “accommodative policy measures.”
“RBI Governor Raghuram Rajan has proven time and again that he has his finger on the pulse of the economy and the cut is indicative of the fact that he has made the right move at the appropriate time to further stimulate the economy,” says Bhim D. Asdhir, President and CEO of Excel Funds Management. “Evidently, the delay by the U.S. Federal Reserve in raising interest rates has given him room to lower rates by more than expected.”
Rajan noted in his announcement that inflation is under control. The RBI has an inflation target of 4%, within a band of plus or minus two percentage points. Inflation currently stands at 3.66%, below the Central Bank’s target rate.
Tan points out that “while Indian bond yields will fall due to the rate cut, investors will benefit from the appreciation in bond prices.”