Indian markets are rallying this week as they price in an interest rate cut at the Reserve Bank’s June 18 meeting.  With the country still in shock after last week’s 5.3 percent first quarter GDP growth print, it is easy to understand the clamour for rate cuts. After all, first quarter growth just a year ago was 9.2 percent.

Yet,  there may be little the RBI can do to kickstart growth and investment.  Many would argue the growth slowdown is not caused by tight monetary conditions but is down to supply constraints and macroeconomic risks –the government’s inability to lift a raft of crippling subsidies has swollen the fiscal deficit to almost 6 percent while inhibitions on foreign investment in food processing and retail keep food prices volatile.  

The other side of the problem is of course the rupee which has plunged to record lows amid the global turmoil. Lower interest rates could  leave the currency vulnerable to further losses.

It is the currency factor that should rule out rate cuts at this points, economists at JP Morgan write. They calculate that  the rupee’s 12 percent plunge since March against the dollar translates into 100 basis points worth of monetary easing.

With India’s export-import sector now accounting for almost 60 percent of GDP now (up from less than 30 percent in 2000 ) that has already resulted in new export orders and an easing of non-oil imports, the bank notes.