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UBS Investment Research
Asian Economic Comment
India: Onion ‘argey-bharji’
6.5% too low for end of year WPI?
December WPI grew 8.4% - bang on consensus, but quite a bit above the 7%
we were expecting, not so much due to weather, but distribution bottlenecks.
Our seasonal model can’t predict weather or strikes, but there is a clear need to
incorporate the 'spicey-onion' effect. If we re-set our seasonal model to today's
new WPI level it generates 7% by March. For now, this is our new FY10 year
end forecast.
Policy implications – it’s about credit not food
So far this cycle the RBI has hiked the LAF interest rate corridor by 150bp to
5.25-6.25% then paused their action. In our view there is little extra tightening
left to do at this stage. Credit conditions have been tight and M3 growth is
much more moderate at c. 16.5%. So why hike, just for the sake of an onion
shortage? There are a couple of other possibilities: (i) bank lending is not
actually slowing yet (Dec 31st data recorded further acceleration to 24.6%), (ii)
as food inflation rises across Asia, other central banks are hiking - why be left
out?
To us credit is the key reason to hike again. So we change our view and now
expect RBI to hike the policy repo rate 25bps in the upcoming meeting (25th
Jan) with another 25bp hike sometime in the next fiscal year.
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