A police officer stands beside Reserve Bank of India (RBI) signage at the central bank’s headquarters in Mumbai, India. (Photographer: Vivek Prakash/Bloomberg)

Asia's Highest Real Rates May Push RBI Chief to Ease Policy

(Bloomberg) -- Asia’s highest real interest rates just got a lot higher after inflation in India slowed sharply in November.

India’s benchmark interest rate, after adjusting for inflation, stood at 4.2 percent after data on Wednesday showed inflation slowed to 2.3 percent. That may push the Reserve Bank of India’s new governor to shift to an easing bias and possibly cut interest rates next year.

Read:India Inflation Slows, Boosting Case for Easier Rate Policy

Asia's Highest Real Rates May Push RBI Chief to Ease Policy

Economists see high real rates as a threat to investment in an economy gripped by uncertainty before a general election next year and a crisis in the shadow banking sector that’s hurting domestic consumption.

“Number of factors are currently impinging on investment: weak external demand, high real interest rates, low capacity utilization and leveraged corporate balance sheets," economists at Nomura Inc. wrote in a report this week.

Governor Shaktikanta Das, who took charge on Wednesday, said economic growth was very much part of the focus of the inflation-targeting RBI. That added to the optimism in the bonds market about the next rate move.

Already, the one-year onshore swap rates are factoring a 50 percent chance of a interest rate cut around April or June, or 100 percent chance of a 25 basis-point cut in August, according to ICICI Securities Primary Dealership Ltd. That’s a turnaround from a view in October for a hike of 100 basis points over the next 12 months.

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