People's Bank of China (PBOC) on Friday cut rates for the sixth time in the last 12 months, as China's growth fell below the 7 per cent mark for the first time since 2009.
In an effort to boost growth in the slowing economy, the Chinese central bank not only lowered the one-year bank lending rate by 25 bps to 4.35 per cent and the one-year benchmark rate by the same level to 1.5 per cent, it also cut its reserve ratio by 50 bps.
While rate cut and lowering of reserve requirements are expected to provide some liquidity for the economy, it will also push down Chinese currency yuan, making China more competitive in terms of exports. Yuan was trading below the midpoint rate of 6.3549 set by PBOC in early morning trade on Monday.
Chinese growth has been moving to a ‘new normal’ as the economy makes a shift from export-driven growth to consumer-led growth. While the shift in China's momentum is expected to help economies in Asia, especially India which is trying to boost exports through the ‘Make in India’ campaign to take China's place as a global exporter, the drastic slowdown has raised fears over the health of global economy.
Here's how the rate cut will impact India:
Exports in trouble again
The Indian export sector has been jittery since the global slowdown with the country's merchandise exports contracting for the 10th month in a row in September. With Chinese central bank cutting rates again, Indian exports may find it difficult to recover as the rate cut is expected to push the yuan down further making China a more attractive export destination.
Move elicits mixed reaction from markets
While the impact of the rate cut by the Chinese central bank on Indian economy is negative, markets had a mixed response. The benchmark stock index BSE Sensex extended gains on Monday adding 0.2 per cent in early morning trades but was trading 0.4 per cent lower in the later part of the day. While risk rally may lead to more funds flowing into emerging markets, especially India, boosting the markets for the short term, the impact may be negligible due to mixed corporate results in the second quarter.
While India is expected to elicit a mixed response to the Chinese central bank’s rate cut, all eyes will be on the next US Federal Reserve meeting which may shed light on the future path of US rates as a hike in the Federal Funds Rate may reverse flows from emerging market economies as safe-haven demand spurts up.