— This is the script of CNBC's news report for China's CCTV on August 4, Friday.
Just a month ago, India inaugurated its tax reform which had a major impact on its economy. In this month alone, the media has been reporting unceasingly about the disorder along India's domestic supply chain and the complaints that many retailers have experienced as a result of this consumption tax reform. Also, according to India's economic data in July, businesses have largely deteriorated in the short run.
The PMI Index released this Thursday is most reflective of this trend. Overall, India Composite PMI Index plunged to 46 in July from 52.7 in June, the steepest drop in eight years.
Besides, India posted a 47.9 Manufacturing PMI for July, down from 50.9 in June. This is the first time, since December last year that the index dropped below the 50 boom/bust line, indicating a recession in the manufacturing sector. At the same time, also straddling on the lower end of the 50 boom/bust line, the services PMI dropped from 53.1 to 45.9, the lowest level since September 2013, signaling a deterioration of the service industry.
In fact, in June, before the implementation of this tax reform policy, the Indian economy was doing relatively well. India's PMI index was at its highest since India's Prime Minister Mody's announcement to abolish its bank notes in November last year. Therefore, the economic deterioration in July could largely be attributed to the introduction of the tax reforms that has brought about disorder in the markets.
Against such an economic backdrop, Reserve Bank of India (RBI) promptly introduced the lowering of interest rate policy to boost the economy.
On Wednesday, the RBI lowered its main policy rate by 25 basis points and cut its repo rate from 6.25% to 6% to a 6½ years low. As for reverse repo rate, it went from 6% to 5.75%. This is the first time since October last year that the RBI announced a rate cut. It is also the first since December last year that any Asian banks lowered its interest rates.
At the same time, we are also seeing a very weak inflation trend in India. In June, CPI index slowed to 1.5%, the lowest in 5 years. It is also far below RBI's 4% inflation target. Yet, in an interview with CNBC, an analyst believed that the tax reform, a large-scale policy, would definitely affect the economy negatively in the short run but starting from next year, the situation may take turn for the better.
[FARAZ SYED, Moody's Analytics] "We expect that to sort of iron out towards the end of the year and growth rates to sort of pick up so it should be mostly transitory but as you mention there is also a hit to sentiment, so a decline in sentiment will obviously spur the cut rates as well."
If economic figures become worse than expected, the RBI will not rule out the possibility of further interest rate cuts. We will continue to keep watch.
CNBC's Qian Chen reporting from Singapore.