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India Central Bank Watch
Another rate hike is coming
Dark clouds are still hanging over the global economy, but
we think the sun will eventually shine through
India’s economy is also slowing, but growth is just
moderating and inflation is still the name of the game
We believe it is premature to expect an end to the tightening
cycle, with the RBI set to deliver another 25bp hike this month
To tighten or not to tighten, that’s not the question
As expected, the RBI raised the policy (repo) rate by 25bps in June. Its hawkish statement
emphasised the upside risks to inflation from global commodity prices and demand-led price
pressures, but also noted downside risks to global growth. The main takeaway from the
statement is that the RBI sees inflation risks as dominant and will continue to tighten, but at
a more gradual pace. RBI’s views should not have changed since then and we expect
another hike on 26 July, but again limited to 25bp.
Turning first to the global backdrop, signs of softness are still evident and downside risks
have increased. Even so, we expect the global economy to pick up during the second half
of the year as inventories have been slimmed down sufficiently, Japanese factories are
back to full speed and fuel prices have eased over the summer. However, there is a risk
that the global soft patch could prove softer and more protracted, with the recent weakerthan-expected US employment and non-manufacturing data highlighting this. The
ongoing European sovereign debt saga does not offer much optimism either.
Shifting focus to the local economy, growth is moderating but not collapsing. Moreover,
the June uptick in the service sector PMI demonstrated underlying resilience, partly
reflecting that India’s more domestically oriented economy makes it less susceptible to
global economic mood swings. Despite the moderation in growth, inflation is not coming
off its highs and is set to rise further as adjustments in diesel and other controlled fuel
prices kick in. In addition, with capacity already tight and domestic demand holding up
reasonably well, underlying core inflation pressures remain firmly in place.
With this backdrop, the RBI is still likely to consider inflation as the dominant concern
and, therefore, continue to tighten, with the repo rate expected to shoot up to 8.25% this
fiscal year (slightly above the neutral rate). The global softness is a concern, but it is most
likely to prove temporary and India’s economy is less vulnerable than Asia’s high-beta
economies. Domestically we are only seeing signs of moderation in growth and in line
with expectations, while inflation is continuing to surprise on the upside
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Central Bank Watch
Another rate hike is coming
Dark clouds are still hanging over the global economy, but
we think the sun will eventually shine through
India’s economy is also slowing, but growth is just
moderating and inflation is still the name of the game
We believe it is premature to expect an end to the tightening
cycle, with the RBI set to deliver another 25bp hike this month
To tighten or not to tighten, that’s not the question
As expected, the RBI raised the policy (repo) rate by 25bps in June. Its hawkish statement
emphasised the upside risks to inflation from global commodity prices and demand-led price
pressures, but also noted downside risks to global growth. The main takeaway from the
statement is that the RBI sees inflation risks as dominant and will continue to tighten, but at
a more gradual pace. RBI’s views should not have changed since then and we expect
another hike on 26 July, but again limited to 25bp.
Turning first to the global backdrop, signs of softness are still evident and downside risks
have increased. Even so, we expect the global economy to pick up during the second half
of the year as inventories have been slimmed down sufficiently, Japanese factories are
back to full speed and fuel prices have eased over the summer. However, there is a risk
that the global soft patch could prove softer and more protracted, with the recent weakerthan-expected US employment and non-manufacturing data highlighting this. The
ongoing European sovereign debt saga does not offer much optimism either.
Shifting focus to the local economy, growth is moderating but not collapsing. Moreover,
the June uptick in the service sector PMI demonstrated underlying resilience, partly
reflecting that India’s more domestically oriented economy makes it less susceptible to
global economic mood swings. Despite the moderation in growth, inflation is not coming
off its highs and is set to rise further as adjustments in diesel and other controlled fuel
prices kick in. In addition, with capacity already tight and domestic demand holding up
reasonably well, underlying core inflation pressures remain firmly in place.
With this backdrop, the RBI is still likely to consider inflation as the dominant concern
and, therefore, continue to tighten, with the repo rate expected to shoot up to 8.25% this
fiscal year (slightly above the neutral rate). The global softness is a concern, but it is most
likely to prove temporary and India’s economy is less vulnerable than Asia’s high-beta
economies. Domestically we are only seeing signs of moderation in growth and in line
with expectations, while inflation is continuing to surprise on the upside
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