The Indian economy was tipped to break into the ranks of the world’s powerhouse economies, but it has seen significant setbacks since the Global Financial Crisis struck. The value of the Rupee has fallen dramatically against the US Dollar in recent years; prior to the worst onslaught of the crisis in 2008, a Dollar would buy 40 Rupees: today it buys 66.32. Official unemployment peaked at 9.4% and fell back to a modest 4.9% level. Inflation in India has come off a high of 11.2% (November 2013) passing through a nadir of 3.7% (July 2015) to stand at 5.7%. The main Indian stock index, the SENSEX has recovered the losses experienced around the world at the start of the year.
The Reserve Bank of India has been battling to constrain inflation, but a fall in the cost of vegetables has seen it fall back in February after six months of consecutive increases. The Reserve Bank has taken this as its cue to reduce the “repo rate” from 6.75 to 6.5%. The repo rate is the interest rate that the central bank lends to commercial banks at. In tandem with the reduction, the Bank has introduced a mechanism whereby the commercial banks will be obliged to pass on the reduction to their customers (at least in part). The Reserve Bank has slashed the repo rate by 1.5% since January 2015, but the reductions have not been passed on to customers to anything like this extent. The repo rate now stands at its lowest level for five years and India watchers anticipate that it will fall further in the course of the year (perversely, this should weaken the Rupee against major currencies). Indeed, to underline this expectation, the Governor of the Reserve Bank of India, Raghuram Rajan, promised that the Bank will retain an “accommodative” monetary policy going forward.
