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On the cusp of policy tightening

India’s Omicron wave should only be a temporary setback to the economic recovery. As long as recurrent large waves of COVID are avoided, we think that economic growth will be faster this year than last. We also think that inflation will soon start to worry the RBI. Consequently, policy rates will be hiked by more than most anticipate.
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India Economics Update

A small helping hand for households

Measures unveiled by Finance Minister Nirmala Sitharaman over the weekend including a cut to excise duties on petrol and ramping up of fertiliser subsidies should offer a small reprieve to households dealing with the sharp rise in fuel and food prices. But the measures won’t be enough to prevent further rises in inflation over the coming months, and will come at the cost of a slightly wider fiscal deficit this year. Asia Drop-In (26th May, 0900 BST/16:00 SGT): Can Asia remain the low inflation exception? Join our 20-minute briefing about the region’s price and policy outlooks. Register here.

23 May 2022

India Economics Weekly

Heatwave damage, MPC minutes, WPI surge

The government’s decision to restrict exports of wheat following heavy damage to crops from the heatwave will have limited impact on the trade balance and inflation. The bigger worry is that the extreme heat will do broader damage to other rabi (winter) crop. Meanwhile, the minutes of the RBI’s unscheduled meeting this month show that several MPC members are keen on frontloading rate hikes to rein in inflation expectations. That supports our view that the repo rate will be hiked by 50bp in the next meeting in June.
Asia Drop-In (26th May, 0900 BST/16:00 SGT): Can Asia remain the low inflation exception? Join our 20-minute briefing about the region’s price and policy outlooks. Register here.

20 May 2022

India Economics Weekly

G-SAP redux?

The recent jump in bond yields is reportedly causing consternation among policymakers. The big worry is the impact that higher bond yields would have on the trajectory of India’s public debt. This sets the stage for more financial repression policies and a potential return of the RBI’s so-called “G-SAP” – the programme introduced last year in which it made regular purchases of government bonds on the secondary market.
EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

13 May 2022

More from India Economics Team

India Chart Book

Borrowing costs will remain in check

India’s 10-year government bond yields have remained stable at around 6% over the past month, taking the unexpectedly large jump in inflation in May and a more hawkish turn by the US Fed in their stride. That reinforces our long-held view that borrowing costs will remain low by historic standards, primarily as a result of the RBI’s policy measures. Indeed, the central bank has made clear that its purchases of government bonds on the secondary market have become a key part of its toolkit, and it duly ramped up its bond-buying commitments by INR1.6trn (0.8% of GDP) this month. Further asset purchases will follow. The RBI has also reinforced its pledge to keep policy rates very low to support the economic recovery. To be clear, we continue to think long-term yields will rise amid a renewed jump in US Treasury yields. But the rise in Indian 10-year yields that we expect – to 6.25% by the end of the year – is likely to be much smaller than in many other EMs and the US itself.

23 June 2021

India Chart Book

Waning portfolio flows not a major macro concern

Foreign investor appetite for Indian assets has faded in recent weeks. Inflows into the equity market have waned, while foreigners have turned into net sellers of Indian debt. This chimes with movements in portfolio flows in other major EMs, suggesting that global factors have been at play. In particular, the rise in US Treasury yields and concerns about a re-run of the 2013 “Taper Tantrum” has played on investors’ minds. However, outflows have been much smaller than they were in 2013. And even if they do pick up, India’s economy is much better placed to cope with a sustained bout of capital outflows than it was in 2013. After all, the current account is in surplus, FX reserves are at all-time highs and the rupee does not look overvalued. One consequence of this is that the RBI will not be in an immediate rush to tighten monetary policy.

18 March 2021
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