By:Craig Botham, Senior Emerging Markets Economist at global asset manager, Schroders.Like Brazil last week, India’s central bank surprised markets with a larger-than-expected cut, easing by 35 bps to take the policy rate to 5.4%. “The accompanying statement was also rather dovish in tone and suggested more cuts to come.This month’s rate cut had been flagged at the previous meeting, the new governor’s first, which also delivered a rate cut,” says Craig Botham, Senior Emerging Markets Economist at global asset manager, Schroders.

Why has India cut rates?

While there is undoubtedly a political motivation for easing policy, Botham says that the macroeconomic backdrop in India also warrants a softer stance at present. “The central bank was able to point to weaker demand both globally and domestically, along with softer inflation.Headline inflation in India remains below the 4% target, and core inflation is weakening. Core inflation excludes food and energy, which can be particularly volatile. The central bank admits there are upside risks from food prices, particularly due to the effects of a subpar monsoon season on crop yields. But an above-target inflationary surge seems unlikely,” says Botham.Helpfully, household inflation expectations are declining and corporates expect an easing of output prices. According to Botham, this has allowed the central bank to project inflation remaining in its target range over the next 12 months.

What does this mean for wider emerging markets including South Africa?

More broadly, the start of Federal Reserve (Fed) easing seems to have been the firing gun for more aggressive easing across emerging markets (EM). “We would expect more rate cuts across the region for as long as the Fed retains a dovish stance, particularly given the policy space central banks enjoy in EM,” says Botham.He goes on to explain that one risk is the escalation in the trade war and the accompanying weakness in risk assets, including EM currencies. This, he says, may make central banks pause, but ultimately they expect ongoing easing from the Fed and elsewhere to spur their EM counterparts on.Speaking in general terms about South Africa, Botham explains that we will be facing the same global currents as the rest of EM, with some added local turbulence from ESKOM fiscal pressures, wage negotiations, and so on. “Given that the SARB already cut interest rates in July, somewhat pre-empting the Fed and sounding cautious at the time, we believe September may be too soon for another cut.“Given this caution and the global backdrop having become more volatile with trade tensions escalating; the weakness in EM currencies will be preying on a lot of minds. While the rand is nearly 10% weaker since late July, if it can remain well behaved then more cuts could be forthcoming in later meetings – but it’s a big if,” concludes Botham.