India’s inflation surprise will strengthen calls from a minority of economists predicting that the central bank will have more room to cut rates and spur growth.
Among these is Hugo Erken, who estimates that consumer prices will rise 3.2 percent in October to December compared with the minimum 4.2 percent increase forecast by the Reserve Bank of India and September’s 3.3 percent rate. The RBI aims to keep inflation at about 4 percent over the medium term.
"The main reason why inflation will remain below the central bank’s target is because of the weakness in the economy," Erken, a senior economist at Rabobank International, said by phone from the Netherlands. "We expect the economy to pick up steam only towards the end of the third-quarter or early fourth-quarter of the financial year" that ends March 31.
This outlook should offer hope to bond investors who have endured a sharp sell-off in recent weeks. Governor Urjit Patel’s monetary policy panel kept rates unchanged this month and retained the outlook at neutral, saying it would closely watch data before the next review meeting scheduled for December.
CPI to Inch Lower
Growth in India’s gross domestic product slowed for a fifth straight quarter and hit a three-year low of 5.7 percent in April to June. While the median estimate in a Bloomberg survey predicts a pick up to 6.6 percent in the next quarter, Erken -- who had correctly called the slowdown -- says GDP will expand just 5.7 percent as last year’s demonetization exercise and the July roll out of a goods and services tax disrupts business activity.
Gross value added -- a key input of GDP -- will grow 6.6 percent in the year through March, according to Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, slower than then RBI’s forecast of 6.7 percent. He also expects inflation to stay at 3.3 percent in October as spikes in prices for vegetables like tomato and onions recede.
"Against this backdrop, we expect the RBI’s monetary policy committee to cut in December to signal a bank lending rate cut before the ‘busy’ October-March industrial season intensifies," Sen Gupta wrote in a note on Oct 10. He was among the first to correctly predict the rate reduction in August.
Surprising the RBI
Loan growth is languishing near a two-decade low as companies staggering under bad debt, with factories operating at around 70 percent of capacity, await evidence of a pick up in demand before they buy machinery or hire more workers. The International Monetary Fund this week cut its GDP forecast to 6.7 percent from 7.2 percent for the current year and to 7.4 percent from 7.7 percent for the next year.
Analysts Shashank Mendiratta and Khoon Goh of the Australia and New Zealand Banking Group, who correctly forecast September’s inflation data, said overall demand pressures were modest amid a widening output gap in the economy.
"We continue to expect the RBI to deliver a 25 basis point cut in December after staying on hold this month," they wrote in a report after Thursday’s data.
India’s slowdown has seen South Asia forfeit its crown as the fastest growing region in the world to East Asia and Pacific, the World Bank said in a report this week. The deceleration also threatens to lead to more job losses and complicate policy choices for Prime Minister Narendra Modi, who came to power three years ago pledging to provide inclusive growth and employment.
Inflation will head toward 3 percent by March 2018, said Abhishek Gupta, a Mumbai-based economist at Bloomberg Intelligence. So, while most analysts see the RBI keeping its key policy rate at 6 percent through 2018, he predicts that there could be a few more reductions.
"For the RBI, lower inflation will come as a surprise," said Gupta. "It’s likely to lower interest rates in December, once data showing slack inflation become available. Beyond that, as the CPI continues to stay below the central bank’s 4 percent medium-term target, more room will open up for further rate cuts."
--With assistance from Manish Modi and Cynthia Li
To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net.
To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Jeanette Rodrigues
©2017 Bloomberg L.P.
