The Reserve Bank of India cut its main interest rate for the third time this year. What does it mean for the global economy and the gold market?

On Tuesday, India’s central bank cut its key interest rate, the policy repo rate at which commercial banks can borrow from the central bank, from 7.5 percent to 7.25 percent, the lowest level since May 2013. It was the third reduction this year, after cuts by a quarter of a percentage point in January and March.

This move appears odd at first, since the Indian economy grew at 7.5 percent in the first quarter of 2015, putting it ahead of China as the world’s fastest growing major economy. However, such impressive growth was partly caused by a new national accounts methodology. Before the government changed the way it measures economic output (the previous gross domestic product calculation approach was replaced by the gross value added method) economists expected 7 percent growth.

What is more important is that there are many signals of economic slowdown. For example, credit growth has declined to a multi-decade low and corporate profits are weak. Industrial production was disappointing recently (up just 2.8 percent in March on an annual basis), exports fell in April for the fifth month in a row, while the volume of bad loans at banks is rising. Another reason for that interest rate cut could be the expected tightening by the Fed. Such a move could withdraw liquidity from emerging markets like India. So it is possible that the Reserve Bank of India wanted to prepare a soft landing for the Indian economy after another taper tantrum.

How can the central bank of India’s move affect the gold market? It should not shake the market, however, the interest rate cut may cause some depreciation of the rupee and, thus, lower the demand for gold of Indian investors. The cut of the policy repo rate is rather significant because it reflects sluggish global economic activity and fears of a next taper tantrum. The possible unwinding of carry trade and renewed global turbulence could support the U.S. dollar, but it should also increase safe-haven demand for gold.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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