The Chinese central bank on Friday cut interest rates for the sixth time in the last 11 months. The People's Bank of China (PBOC) lowered its one-year benchmark bank lending rate by 25 basis points to 4.35 percent, effective from October 24. The cut is one of the government's many attempts in jumpstarting its slowing economy.
The central bank cut its one-year deposit rate by 25 bps to 1.5 percent and also removed the cap on deposit rates for commercial banks and rural cooperatives.
Speaking to CNBC-TV18 Geoffrey Dennis of UBS and Peter Elston, Seneca Investment share their views on the central bank's moves.
Dennis says the cut won't aid India in terms of inflows as the Dalal Street is currently observing a risk rally and hence, India will not be the first destination for money to flow into. He further explains the move will not change anything for the US Federal Reserve in terms of its timeline on hiking its interest rates.
Below is the verbatim transcript of the interview..
Latha: How are you reading this move by the People's Bank of China (PBOC)?
Dennis: It is positive news. We have been expecting for some time that the Chinese would cut interest rates again to try to support growth in the economy and coming on the back the fact that the Fed didn't raise rates in middle of September and of course the commentary from Mr Draghi yesterday you are right, it will extend the risk rally for a while longer. So, you have to view this good news for equity markets in emerging - in at least in the short term.
Latha: Does this mean that funds could flow into the Chinese markets and they would be preferred over Indian markets?
Dennis: I don't think so necessarily. First of all it was no real surprise that the Chinese did cut rates. Obviously one never knows about the exact timing. I do think it is going to continue the risk rally at least for a period of time into emerging equity markets overall now. It is not clear that India is necessarily the logical first place that investors would head towards. If there is a risk rally going on then it is more likely to head to some of the higher base commodity driven markets that are really been hit very badly this year, markets like Brazil and South Africa also perhaps Turkey. So, I don't particularly think that India will suffer relative to China at all. This is all part of more of a kind of global liquidity move and I would expect to see all emerging markets benefit to a certain extent.
Latha: We heard Draghi warning of more stimulus and now the People’s Bank of China (PBOC) has actually moved and cut reserve requirements. Now which risk assets will markets chase?
Elston: The action that we have just seen in China just reflects the fact that the slowdown there is very pronounced and it is very persistent. It is going to continue for some time and what it is a reflection of is just how long the expansion was. It was actually in many respects sort of a multi-decade expansion that we had since the 1980s; China embarked upon the economic expansion that was based on fixed asset investment whether that was in terms of building infrastructure or building property of one form or another and you can only do that for so long.
So, ultimately you started to see things slowdown on that front and it is going to continue for some time and that means that these rate cuts that we have seen since, I think the first one was about a year ago, now probably going to continue and in line with that you are probably going to see reserve requirements cut as well. So, nothing too surprising but there is probably more that lies ahead.
Ekta: How does this change things for the global commodity cycle if at all?
Elston: It just confirms the fact that demand in China is still extremely weak or at least it is weakening and so seeing the evidence of that in terms of central banks or the central bank in China reacting to that is probably going to make people realise that there is still a lot of weakness in demand for commodities and I suppose on balances this might mean that we see a bit of a pullback in commodity prices.