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Inflation trending lower, but underlying price pressures still strong The bigger-than-expected drop in inflation in July is a challenge to our view that the MPC will hike the repo rate by 50bps again next month. But core inflation remains pretty strong, …
12th August 2022
BJP-led NDA loses some clout For all its power in parliament’s lower house (Lok Sabha), a majority in the upper house (Rajya Sabha) has remained elusive for PM Modi’s BJP. As the main party in the National Democratic Alliance (NDA), it has been closing in …
Trade data point to softening in exports Preliminary data released this week showed India’s goods trade deficit widening from a seasonally-adjusted $25.8bn in June to $29.3bn in July, the largest on record in dollar terms. But while the widening in the …
5th August 2022
The RBI today raised the repo rate by 50bps to 5.40% as we had anticipated, and struck a relatively hawkish tone despite inflation surprising to the downside in recent months. It’s clear that the tightening cycle still has legs and we expect another …
Services coming off the boil, price pressures past their peak India’s July PMIs show a reversal of the recent outperformance of services. That said, both the services and composite PMIs remain high by pre-pandemic standards, pointing to growth continuing …
3rd August 2022
Domestic demand propping up manufacturing activity India’s manufacturing PMI was remarkably strong in July, with domestic demand supporting activity despite a negative global backdrop. The rebound will give the RBI more confidence to hike by 50bps this …
1st August 2022
Conditions continue to deteriorate in industry Favourable base effects kept y/y growth in India’s core infrastructure industries elevated in June. But once those base effects are removed, it’s clear that the industrial sector is entering a weaker phase. …
29th July 2022
Data to mid-July show that the RBI’s FX reserves have dropped to US$572bn, the lowest level in almost two years. (See Chart 1.) Chart 1: FX Reserves (US$bn)* Sources: CEIC, Capital Economics While part of that is a valuation effect, it is mainly due to …
Drop in inflation unlikely to stave off another 50bp hike next week Another 50bps possible in September, but tightening to slow after inflation peaks in Q3 Repo rate to rise by more than most expect by early 2023 We expect the MPC to continue frontloading …
28th July 2022
Remittances to support external position Remittances (money transferred by foreign workers back to their home countries) are an important and often underappreciated source of foreign currency for India. The RBI’s latest monthly bulletin released this week …
22nd July 2022
The latest population projections released by the UN this month show that India will overtake China as the world’s most populous nation in 2023 (see Chart 1), a touch earlier than previously expected. The UN also projects that India’s working-age …
21st July 2022
We’ve recently received several questions from clients on how the near-term outlook for India is shaping up. This Update summarises our big picture views for the next six months or so by providing answers to five key questions. Question #1: What is the …
20th July 2022
INR settlement unlikely to see widespread use The RBI announced earlier this week that it has put in place a mechanism for international trade to be settled directly in rupees “in order to promote growth of global trade” and “support the increasing …
15th July 2022
WPI inflation has probably peaked Wholesale price inflation in India dropped back in June from its record high, and now appears to have passed its peak. CPI inflation will also peak in the next few months, but in the near term it’s still likely to rise …
14th July 2022
Inflation holds steady, but will climb again soon Headline consumer price inflation held steady in June, but the core rate rose further. We expect inflation to climb higher above the RBI’s target in July and August, which should be enough for the MPC to …
12th July 2022
Trade tweaks to have offsetting impact… Following the reintroduction of the sovereign gold bond scheme in June, the government has further stepped up its attempts to reduce gold imports, with the Finance Ministry hiking the basic import tax on gold from …
8th July 2022
Overview – Strong economic growth and surging inflation have prompted the RBI to kick-start its hiking cycle and we think the central bank will continue to frontload policy tightening. In all, we think the repo rate will rise by a bit more than the …
7th July 2022
Services sector booming India’s June PMIs show exceptionally strong activity in the services sector is offsetting slower growth in manufacturing. That may give the RBI some added confidence to continue frontloading policy tightening. India’s services PMI …
5th July 2022
GST hikes don’t signify tighter fiscal stance… The Finance Ministry’s announcement this week of hikes to the GST rate on products ranging from hang glider parts to LED lamps comes as something of a surprise. After all, it goes against the grain of the …
1st July 2022
Manufacturing slowing and tentative signs of inflation easing India’s manufacturing PMI dropped back in June, adding to the evidence of a slowdown in the broader industrial sector. Meanwhile although there are tentative signs of price pressures in the …
Headline figures mask slowdown in output growth Base effects boosted y/y growth in India’s core infrastructure industries to a 13-month high in May. But stripping out base effects reveals that industry might be entering a softer patch after a strong few …
30th June 2022
SGBS may help at margin to reduce gold imports Among the reasons for gold's continued popularity with families in India is its use as an inflation hedge. So it’s unsurprising that the recent surge in inflation has coincided with a renewed jump in gold …
24th June 2022
The minutes of the MPC’s June meeting – in which the repo rate was hiked by 50bps to 4.90% – show that combatting inflation remains the priority and suggest that tightening will continue to be frontloaded. The MPC voted unanimously to raise the repo rate …
22nd June 2022
The rupee has held up better than most EM currencies this month and the recent drop in FX reserves strongly indicates that this is in part because the RBI has once again ramped up its FX interventions. (See Chart 1.) RBI Governor Shaktikanta Das has made …
RBI holds firm in defence of the rupee Data late last week showing a larger-than-expected rise in core inflation in the US in May, and the Fed’s hefty 75bp hike this week, have contributed to a broad-based sell-off in global financial markets with many EM …
17th June 2022
India’s goods trade deficit didn’t widen in the immediate aftermath of Russia’s invasion of Ukraine – rather counter-intuitively for a major commodity importer. But that has now started to happen, and a closer look at the data suggests the deficit may …
16th June 2022
WPI inflation suggests drop in CPI inflation will be short-lived Indian wholesale price inflation climbed to another historic high in May. The rise in food prices in particular suggests that some of the upside risks to the inflation picture we have been …
14th June 2022
Drop in inflation unlikely to last India’s consumer price inflation dropped back in May, but much of that was due to base effects. We expect inflation to resume rising from June, prompting the RBI to continue frontloading policy tightening. Headline CPI …
13th June 2022
RBI frontloading continues The key event this week was of course the Reserve Bank’s policy announcement, in which the MPC stepped up the pace of tightening by hiking the repo rate by 50bps to 4.90%. We wrote about the decision here , and discussed it in …
10th June 2022
The RBI hiked the repo rate by 50bps to 4.90% today, as we had anticipated, and made substantial upward revisions to its near-term inflation forecasts. Further tightening will follow over the coming months. But we also expect policymakers to step up …
8th June 2022
Headline CPI inflation in India is likely to have dropped in May, primarily due to base effects. But beyond May, we expect inflation to resume rising, reaching over 8% by August. The RBI is likely to respond by frontloading policy tightening in the coming …
7th June 2022
Stage set for strong GDP growth in 2022… GDP data for Q1 (Q4 of FY21/22) released this week showed that the economy weathered the Omicron wave pretty well. Even though the annual growth rate slowed from 5.4% y/y in Q4 of 2021 to 4.1%, GDP still eked out a …
3rd June 2022
MPC set to follow off-cycle rate hike with 50bps of tightening in both June and August Pace of tightening to slow after inflation peaks in Q3 We will be hosting an online Drop-In after the June MPC meeting, register here We think the MPC will follow its …
2nd June 2022
Policy tightening by the RBI is putting public finances stretched by the pandemic under further strain. While an increase in debt financing costs is inevitable, we expect the government and RBI to step up financial repression so that the full impact of …
1st June 2022
Manufacturing performing well, but few signs of inflation easing India’s manufacturing PMI held steady in May, but there are further signs of price pressures becoming more intense last month. That supports our view that the RBI will frontload its policy …
Economy well-placed for 2022, but downside risks growing Indian GDP data for Q1 (Q4 of FY21/22) show that activity held up much better during the Omicron outbreak than during previous virus waves. The economy is well-placed for strong growth over 2022 as …
31st May 2022
Governor Das confirms more rate hikes to come… RBI Governor Shaktikanta Das was in a candid mood when on media duties this week. Among the more notable comments, he said that the MPC would be revising up its inflation forecasts for this year and next in …
27th May 2022
The RBI kicked off its tightening cycle this month with a 40bp hike to the repo rate (to 4.40%) in an unscheduled policy announcement. The minutes to that meeting show that several MPC members are keen to frontload policy tightening to keep a lid on …
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. …
23rd May 2022
Heatwave damage could extend beyond wheat The news has been dominated this week by the government’s decision to restrict exports of wheat on food security grounds, following heavy damage to crops from the heatwave. This has caused ructions in the global …
20th May 2022
Rise in bond yields becoming a concern The rupee dropped to an all-time low against the US dollar this week but, as we noted here , the big picture is that it has held up much better than most other EM currencies over the past few months. One reason is …
13th May 2022
Inflation surges to eight-year high Headline consumer price inflation surged beyond even our above-consensus forecast to an eight-year high of 7.8% y/y in April. Given that it is likely to rise even higher over the coming months, further hikes to the repo …
12th May 2022
The Indian rupee hit a record low against the US dollar today, but the big picture is that RBI intervention has helped it hold up better than most EM currencies recently. Given that the RBI has ample FX reserves, we expect the rupee to remain more stable …
9th May 2022
Power shortages pose upside risk to inflation The ongoing heatwave in India is prompting a surge in electricity demand that power companies are struggling to meet. (See Chart 1.) In fact, power shortages at peak times were more widespread in April than in …
6th May 2022
Activity robust, but price pressures intensifying India’s April PMIs show activity picking up, but power shortages may weigh on output soon. The surveys also provide more evidence of price pressures growing. That suggests the RBI will follow up …
5th May 2022
The Reserve Bank today turned even more hawkish with an unscheduled, unconventional 40bp hike that takes the repo rate to 4.40%. We had been among the early hawks on Indian monetary policy and were already expecting more rate hikes than the consensus this …
4th May 2022
Core industries painting a mixed picture Growth in India’s core infrastructure industries slowed in March as production of some energy commodities fell. However, there are tentative signs that the rise in commodity prices caused by the war in Ukraine may …
29th April 2022
Repo rate hike on the horizon MPC members have been in a chatty mood this week, with both Jayanth Varma and Ashima Goyal giving interviews to the press. Despite being at opposite ends of the policy spectrum (Mr Varma is the most hawkish member of the …
The key policy development this month was the introduction of a new Standing Deposit Facility (SDF), through which the RBI will drain excess banking sector liquidity. The SDF now provides the floor for the interest rate corridor, previously set by the …
28th April 2022
The minutes of the MPC’s early April meeting – in which the committee kept the repo rate on hold but introduced a new rate that set a higher floor for the interest rate corridor – confirm that taming inflation has taken precedence over supporting the …
22nd April 2022
