RBI to raise the repo rate again, by 25bp to 6.25% : Morgan Stanley

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Asia/Pacific Weekly
Preview
Inflation Rising or Peaking?

India – Monetary Policy Announcement (Nov 2): We

believe that strong domestic demand growth and

near-term macro stability risks will warrant the RBI

staying on course for policy rate hikes. We expect the

RBI to raise the repo rate again, by 25bp to 6.25% at the

next monetary policy review on November 2, 2010.

China – Mfg PMI for October (Nov 1): Seasonally,
October PMI was found to be averagely 1.3pp lower
than September during 2005 -09 (excluding Oct 08).
However, given the strong momentum in 3Q and the
elapse of one-off effect of supply adjustment for
energy-conservation target, we expect October PMI of
53 with a milder correction than the historical average.
As an early gauge of CLPF PMI, Morgan Stanley China
Business Conditions Index (MSCBCI) also registered a
softer reading in October (from 68.2 in September to 67
in October).



Hong Kong – Retail Sales for September (Nov 1): We
expect retail sales to record solid double-digit growth in
September in both value and volume terms, supported
by strong inbound tourism (visitor arrivals +21% YoY)
and buoyant asset prices. We forecast a 15% YoY
growth in sales value and a 13% YoY gain in volume, a
modest deceleration from the pace in August as the
effects of 2009’s high base begin to kick in.



Indonesia – CPI for October (Nov 1) and Monetary Policy Meeting (Nov 4): After having shown a deceleration in
September post Muslim festivities, we expect inflation to accelerate in October (+6.1%YoY vs. +5.8%YoY in September).
Weather conditions remain wet and rice prices have edged up further. Our base case is for BI to hike by 25bps in the
November 4th monetary policy meeting. However, we concede that the debate is increasingly becoming one of “what we think
BI should do” versus “what BI does”. The risk is that policymakers may delay rate hikes so as not to attract further rate-arbitrage
flows. Whilst the stable to slightly appreciating currency from strong capital inflows could help soften import-led inflation
somewhat, we think the rising liquidity build-up, incomplete sterilization and rising credit increase the risks of supply-side food
inflation spilling over to core inflation amid the strong domestic demand trajectory.
Korea – CPI and Trade for October (Nov 1): October CPI and foreign trade are key macro data to watch next week. Korea's
CPI inflation surged to 3.6% YoY in September, driven by sharp rises in food prices, particularly vegetables, fruit and fishery
items. September’s higher inflation may have been caused in part by the Chuseok festival in the month: we think October’s
figure is likely to decline on a MoM basis but expect the YoY rate to stay above 3% in the coming months. We estimate export
and import to increase 18.0% YoY and 16.8% YoY respectively in October, on the basis that Korea's foreign trade was not yet
affected in the month by the external uncertainties, particularly as shipments of Xmas orders began in the month. We also think
market worries on the appreciating KRW are overdone as, in our view,Korea's export competitiveness remains intact due to
the continuing significant price gap between Korea and Japan that has existed since 2008.
Taiwan – CPI for October (Nov 5): Taiwan's macro focus next week would be on October CPI. Taiwan's CPI inflation has
been low in recent months due to the high base effect caused by the severe typhoon last year. We think the high base effect
will continue to dominate the headline inflation in October. We forecast Taiwan's inflation to stay at a low level of 0.2% YoY,
compared to 0.3% in September.
Australia – RBA cash rate decision (Nov 2), house prices (Nov 1) and retail sales for 3Q10 (Nov 4): Plenty of important
data releases lined up. House prices, retail sales are all important data points for the market to focus on. The week’s key event
however will be the RBA’s cash rate decision. The lower than expected CPI number yesterday gives the RBA some breathing
space, and if house prices keep moderating, we believe the central bank can stay on hold. We now expect a cash rate hike in
February next year.