A rate cut does not help

Marc Faber, in a recent conversation with The Economic Times, was not too keen on a rate cut when asked whether India’s central bank was likely to reduce rates soon.

He held that a rate cut would boost Indian equities (PIN) (EPI). However, movements in India’s equity markets benefit less than 3% of the population.

This was in line with his outlook on India’s economy, where he believes that broader based economic growth would put India in good stead, even if the pace of economic growth is lower than targeted.

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India’s central bank – the Reserve Bank of India – maintained status quo on the repo rate in its February meeting. This had surprised financial markets which were expecting a cut due to the expected negative impact of demonetization, and growing inflation.

So what matters to Marc Faber?

Instead of seeing the central bank cut the repo rate, Marc Faber would prefer to see a stronger rupee, which he thinks is a more desirable prospect to the average Indian.

The Indian rupee declined by 3% to INR 68.7 per USD in the days following Donald Trump’s victory on November 8. It has risen above 67 per USD as of February 10.

A strong rupee is helpful in keeping the import bill in check as fewer dollars are spent on paying for international goods. Given India’s high crude oil imports, which form a third of total imports, a strong rupee can keep government finances in check. The government then gets more to spend on public utilities and social schemes, which ultimately benefit the ‘average Indian’ he was referring to.

However, his view on rate cuts appears a bit restricted. A rate cut in October 2016, followed by demonetization, has driven down lending rates in India and improved monetary transmission. Consumers looking for loans have benefited from the decline.

In addition to India, Marc Faber was bullish on emerging markets as an asset class. Let’s look at his views in detail in the next article.

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