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ChartBrief 127 - India cuts interest rates, what's next?

Last week 2 things dropped in India: the manufacturing PMI for July dropped to the worst reading since the financial crisis, and the RBI cut interest rates... also to the lowers point since the financial crisis. So what's next for Indian macro and markets?

Well it's first worth pointing out that the drop in the PMI is basically a result of the new goods and services tax (GST). Much like the shock demonetisation big-bang reform late last year (which also crashed the PMI), the GST implementation is another case of short-term pain for longer term gains. It's actually a positive sign for the medium-long term as it represents another of a key set of reforms, and for emerging markets the future relies on reforms to drive better governance, business conditions, and drive more sustainable growth. The rate cut then comes at an opportune time, and will aid what will likely be an eventual rebound in the PMI. In the mean time the MSCI India index has gone on to make new highs.

The GST implementation, similar to the demonetisation, crashed India's manufacturing PMI. At the same time the Reserve Bank of India has cut rates as inflation undershoots target.

India's OECD Composite Leading Indicator looks to be in the process of making a short-term cycle low, and despite the short-term setback of GST implementation helps understand the existing underlying trend in India's economy.

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