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Market Turmoil Adds to Case for India's Central Bank Caution

Updated on
  • All but one of 33 economists in survey see RBI on hold
  • Stock market outflows could weaken rupee and stoke inflation

Wild market moves this week are set to give ammunition to the Reserve Bank of India to hold interest rates lower for longer.

The RBI will announce its rate decision at 2:30 p.m. at the end of a two-day meeting on Wednesday. All but one of the 33 economists in a Bloomberg survey predict the benchmark repurchase rate will remain unchanged at 6 percent -- its lowest since 2010 -- with Rabobank International the only one calling for a 25 basis-point hike.

While the swaps markets are pricing in some tightening in 2018, financial market turmoil could force Indian policy makers to refocus on supporting growth and away from rising price pressures.

Read: What the Stock Market Meltdown Means for Asia’s Central Banks

"The recent sell-off is likely to make the MPC sound more cautious," said Anubhuti Sahay, head of South Asia economic research at Standard Chartered Bank. "However, we expect them still to sound hawkish and stay vigilant on inflation risks even as they hold policy rates on hold."

Indian inflation accelerated to a 17-month high of 5.2 percent in December, above the RBI’s 4 percent medium-term target.

The central bank will be watchful about the rupee -- which fell to a near-two month low on Tuesday -- as this could raise the import bill and further stoke inflation. A steady outflow of foreign investment from the stock market would also make it harder to bridge a widening current-account deficit and invoke memories of 2013, when India was among the ‘Fragile Five’ group of economies that faced intense selling pressure amid the taper tantrum.

The currency is down 0.6 percent against the dollar this year, among the weakest performers in Asia.

What our economists say...

"The market meltdown adds to pressure on India’s central bank to strike a balanced tone at its meeting Wednesday. Taken together with the global sell-off, a rise in domestic rates following the budget, and introduction of a capital gains tax, a hawkish tone from the RBI might be more than the equity markets can bear," said Abhishek Gupta, Bloomberg economist.

— With assistance by Subhadip Sircar

(Updates currency’s drop in seventh paragraph.)
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