A day ahead of the money policy review by the Reserve Bank of India, Barclays Capital said the apex bank will remain focused on fighting inflation and another 25 basis points rate hike is imminent on September 16. The current inflation print supports this view,it said.
Analysts Siddhartha Sanyal and Kumar Rachapudi said while the August inflation print was not way above market expectations, it is still too high for comfort at the central bank.
Food inflation continues around the double-digit mark. Pressures from manufacturing inflation also remain stubborn. Most importantly, non-food manufacturing inflation – the so called ‘core’ rate – staying above 7.5 per cent year on year in August offers the RBI very little room to pause, as the central bank has been highlighting this indicator as a key driver of policy for several months.
The sharp downside surprise in headline industrial production (IP) data, in our view, will have far less bearing on the overall policy stance.
“In fact, we believe, the underlying trend in IP is clearly more stable than what the July headline print suggested – excluding just a couple of volatile sub-components, IP actually rose 6.8 per cent year on year in July,” they said.
Undoubtedly, the re-intensification of global growth concerns over the past couple of weeks will play a significant role in the RBI’s thinking ahead of this week’s meeting.
Heightened global uncertainty will likely cause the RBI to wait until the last possible minute to decide its move, and the risks of any sudden further deterioration of the global financial markets pushing the RBI into a pause are non-negligible.
Nevertheless, given the RBI’s recent demonstrated bias of staying focused on containing inflation rather than any other objective, consistency on the part of the central bank would mean that the RBI will stay focused on inflation management.
The central bank is likely to maintain a hawkish tone on domestic inflation. However, it is expected to accommodate its concerns about the global situation more in the upcoming policy release than the previous rounds of policy and, accordingly, will likely sound more cautious and watchful on that front.
“Given the global backdrop, while the market is still not pricing in the 25bp rate hike, we do not recommend paying 1y OIS outright. We suggest positioning via 1×2 flatteners with a target of -70bp (onshore). We recommend long positions in 10-year G-secs at current levels, targeting 8.0% in three months. While we think the risks of fiscal slippage remain high, recent statements by government officials have underscored their determination to meet the fiscal targets. We do not think the government will announce any increase in the expected Rs 1.67trn of issuance in the H2 FY11-12 calendar. Instead, we think the government is likely to front-load H2 borrowing and aim to complete it by end-January 2012, if not earlier. This would likely allow the government leave some room in the last two months of the fiscal year in case it needs to borrow additional amounts from the market,” they said.