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Ahead of the Reserve Bank of India (RBI) policy, both the domestic and global backdrops remain considerably uncertain. Growth momentum is weak and is likely to remain so in the coming quarters. The likely elevated-for-longer interest rate trajectory is emerging as a fresh headwind for growth. Moreover, government finances are again coming under pressure, which could act as a constraint for government spending in the coming months.
On the other hand, headline inflation reached 6.5 per cent in September, against sub-five per cent in June. The new RBI governor clearly wants to reinforce the central bank's inflation-fighting credentials. Thus, while core inflation (sub-two per cent) is considerably soft and the recent up-tick in WPI (Wholesale Price Index) and CPI (Consumer Price Index) has been more due to supply-side issues such as food inflation, the central bank remains concerned about the potential adverse spill-over effects and medium-term inflation expectations.
While the growth-inflation dynamics remain markedly unfavourable, the current account deficit-a key problem in recent years-has improved rapidly of late. It could be less than $60 billion in 2013-14 (against $88 billion in 2012-13), offering the rupee some relief. The delay in tapering the quantitative-easing programme by the US Federal Reserve is another near-term positive for the rupee. The sentiment has also improved significantly since early September, after RBI announced policies to attract near-term capital flows. We expect the rupee to have a stable-to-positive bias over the near term-it is likely to stand at 61/dollar through the next three-six months.
In sum, stability in the rupee has given the central bank room to unwind extraordinary liquidity-tightening measures relatively quickly. On the other hand, we expect RBI's surprise September repo rate rise, by and large, to be a one-off, rather than the first of a series of increases. After all, the growth outlook remains depressed and inflation prints may moderate in the coming months, as and when food inflation softens. As the central bank seems keen to send a stern inflation-fighting message, we acknowledge the risk of another repo rate rise next week, or in RBI's December policy. Our base-case expectation remains that of a flat repo rate (at 7.5 per cent) trajectory in the coming months.
Siddhartha Sanyal
Chief india economist, Barclays Capital
Chief india economist, Barclays Capital
