India: Rising inflation, slowing growth - ING

Rising inflation, slowing growth trends will keep the RBI on hold for a prolonged period and a tailwind of fiscal slippage will keep USD/INR and the government bond yields on an upward bias, according to Prakash Sakpal, Economist at ING.

Key Quotes

“India’s growth-inflation dynamics have shifted in recent months in favour of a stable RBI monetary policy. We expect today’s CPI and industrial production releases to reinforce the shift.”

“The RBI wants lower inflation and we don’t think on present trends it will get it anytime soon. CPI inflation dipped to the cycle low of 1.5% YoY in June and has accelerated since to 3.36%. The consensus is forecasting a further rise to 3.50% YoY in September, while we see the risk of it hitting (again) the RBI’s 4% medium-term policy target due to rising food, fuel and transport prices. The RBI has warned of fiscal slippage posing inflation risks in the period ahead and has revised its projected inflation path for the second half of FY2017/18 (April-March) to 4.2-4.6% from 4.0-4.5% in the October policy meeting. Given global concerns about the breakdown of the Philipp’s curve, India is among only a few economies where inflation has been hitting the central bank target (but in an undesired direction).”

“Firmer exports support the consensus of firmer IP growth of 2.7% in August (INGF: 2.0%, prior 1.2%). In most other Asian economies (see Malaysia below) the export recovery this year has barely stimulated manufacturing activity and India is no exception. Hence our below-consensus IP growth forecast.”

“We share the consensus view that increased downside growth risk and upside inflation risk will keep the RBI on hold for a prolonged period. A tailwind of fiscal slippage will keep USD/INR and the government bond yields on an upward bias.”