Reserve Bank of India surprises with a hike, focus turning rapidly to CPI : Capital Economics The Reserve Bank of India (RBI) surprised the market today by hiking the repo rate by 25bp to 8.00%. It said in its statement that it is not anticipating further near-term tightening at this juncture, which probably means that the RBI’s rate hiking cycle is now over. However, it will be a while before the central bank considers cutting rates to give the economy some much-needed support. The consensus view ahead of today’s meeting was that rates would be kept on hold, with 42 out of 45 economists surveyed by Bloomberg, including ourselves, sharing that view. The other three economists correctly predicted todays move. The latest hike means that the RBI has now hiked the repo rate by a cumulative 75bp since September. Ahead of today’s meeting there had been some calls for the RBI to cut rates in response to a recent slowdown in inflation. Price data for December showed wholesale price inflation falling to 7.5% y/y, from 6.2% in November, and consumer price inflation falling from 11.2% y/y to 9.9%. However, the RBI clearly wants to see inflation, particularly consumer price inflation, fall a good deal further. We have been arguing for a while that the RBI is likely to pay increasing attention to consumer price inflation. Along those lines, an RBI-commissioned report released last week proposed that the central bank adopt headline consumer price inflation as the nominal anchor for policy, with an 8% target for the first year. The RBI’s statement today suggested that it has already taken these recommendations on board. It is now looking to bring inflation below 8% y/y by January 2015. Given that household inflation expectations are entrenched at double-digit rates, consumer price inflation will ease only gradually. As such, we think it is unlikely that the RBI will consider reversing its recent rate hikes before late-2014. In the meantime, tight monetary policy will continue to weigh on the economy.
Posted on: Tue, 28 Jan 2014 06:20:16 +0000
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