India’s CPI finally hit double digits after rising for 3 consecutive months.
Keeping price in check is a huge challenge for the Reserve Bank of India, as it need to juggle between keeping a lid on prices while at the same time promote growth. Unfortunately for RBI, these 2 goals appear to be mutually exclusive when it comes to using Interest Rates as the means. In the latest announcement back in Dec ’12, RBI has indicated that it would like its monetary policy to “shift focus” on growth as inflation appears to have moderated somewhat in the past 2 months (Oct and Nov data 2012). Indeed, though CPI breached double digits, the rate of increase is slowing down, reinforcing RBI’s forecast of steady inflation in 2013-2014, hence it is unlikely that this new development would shackle RBI’s decision to cut rates as part of their 3rd Quarter review on 28th Jan.
Some may think that RBI may be deluding themselves in their belief that current inflation rate is desirable, but taking a look at historical inflation rates paint a different story. Average CPI since the financial crisis hit is as follow:
’08 – 8.32%, ’09 – 10.83%, ’10 – 12.11%, ’11 – 8.87% and ’12 – 9.13% – India is no stranger to double digit inflation for the past few years. WPI has also softened to 7.18%, compared to 7.24% in November. These provide RBI more scope to be growth focus while inflation take a backseat, making a case for a higher likelihood of a 25 bps rate cut soon.
From a technical point of view, INR has strengthened back to the consolidation area found in Dec ’12, trading back below the 23.6% Fib retracement . This does not mean that traders are believing that the rate cut won’t happen – on the contrary – out of the 11 analysts polled by Bloomberg, 9 call for a 25 bps rate cut while the other 2 called for a 50 bps cut. This decline in USD appears to be related more to the weakening of USD due to global optimism rather than INR driven. A good indication that lend credence to this hypothesis is the fact that USD/INR went lower than 18th Dec low after “Cliff” deal. Furthermore, USD strength post Hawkish FOMC minute was quickly erased in the face of global equities pushing new highs during the following week.
Should that hypothesis be true, RBI will be much more confidence slashing rates knowing that weakening in INR may be offset by gain in currency strength due to USD weakness, reducing inflation risks.
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