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Slashing rates may help the market short term, but it won’t be enough to support growth long term

The Reserve Bank of India cut rates for the fourth time in four months as weekly inflation data continues to provide Prime Minister Singh’s government with justification to take up rates. Indian stocks rallied for a second day on the news, but trade data released yesterday suggests that the long term impact of the cuts will be minimal. Exports declined again in November by nearly 10% year-over-year, the second consecutive decline. For a country in which over a third of GDP is dependent on external trade, declining foreign demand is ominous.

In the face of increasingly grim data, the Indian recovery plan looks woefully inadequate -particularly when contrasted with China’s massive $580 billion stimulus package. The doubling of limits for foreign holdings in government debt that accompanied the rate cuts suggest that Singh’s team is already scrambling to find ways to finance the stimulus measure announced without reducing current spending on social services – a necessity if they hope to survive this year’s elections.

We bought back our IFN short on Tuesday to take a modest profit and get out of the way of a squeeze rally spurred by this rate cut, which we anticipated would arrive even if WPI came in flat. We will continue to keep our eye on the Indian market and will look to re-short into strength opportunistically.

Andrew Barber
Director