Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong, comments on the outlook for Indian inflation, monetary policy and the rupee in a report published today.
India’s wholesale prices rose 9.02 percent in November, according to the median estimate of economists surveyed by Bloomberg before data due today. The Reserve Bank of India will review borrowing costs on Dec. 16.
The rupee fell 0.7 percent yesterday to 53.2250 per dollar, touching a record low of 53.52. It has slid 16 percent this year.
“Inflation data will be the highlight of the day. We expect a drop to 8.6 percent year-on-year from 9.7 percent, much deeper than consensus calls. Such a drop would be significant, and would take inflation to a one-year low. It may stoke speculation that the RBI will cut rates on Friday, putting downward pressure on the rupee.
“However, we think the RBI will pause, because the other options are not viable. First, inflation remains too much above target so cutting rates would fuel inflation expectations -- it’s too early for that. Second, the rupee would come under further pressure due to deterioration of interest-rate differentials and doubts over central bank resolve to fight inflation if they cut too soon. And a weaker rupee would add to imported inflation. The lack of a rate cut could in itself provide some support for the rupee as some in the market may be betting on one.”