Overshadowed by the Greek news was the lack of a rate cut overnight from the Reserve Bank of India, which came as a surprise to markets. Most were expecting at least a 25bp cut in the main refinancing rate (from the current 8.00%), with some gunning for 50bp. Similar to its BRIC peers India is facing slower growth but it appears that the inflation picture stood in the way of an easing. This sits in contrast to the easing seen in recent weeks both from Brazil (continuing the easing cycle started last year) and China. But compared to Brazil, the currency is a bigger factor for the Indian authorities. Over the past month the rupee has been one of the weakest performers of the emerging market currency board with just the Russian ruble performing worse over this period. India, however, has to worry more about the currency given that imports as a ratio to GDP (around 28%) are twice that of Brazil. As such, the recent weakening of the currency poses a greater threat to the inflationary outlook.
Of interest though is that the currency weakened on the announcement of rates being kept on hold, so if the authorities were looking to stem the recent weakness, their efforts look to have been unsuccessful at first glance. The reaction appears to be more linked to the diminished level of confidence among investors in the ability of the authorities to deal with the slowdown in the economy. In the wider picture this is not welcome news because, in contrast to 2008-2010, the ability of the large emerging nations to counteract the weakness being seen elsewhere is looking seriously diminished.