Monday, September 19, 2011

India tightens

The Reserve Bank of India (RBI) raised interest rates again on Friday. The repo rate now stands at 8.25%.

There are clear signs economic growth is slowing: GDP growth was 7.6% in the year to June and growth in industrial production slowed sharply in the year to August. However, inflation remains stubbornly high. The Wholesale Price Index rose to 9.8% in the year to August.

It seems to us that of the key emerging markets, India is facing the most entrenched inflation problem. What started as a food price supply shock problem has spilled over into more generalised inflation. Also, with India less reliant on exports than the likes of China, slowing global demand will have a less negative impact on growth.

For that reason, combined with the fact that fiscal policy remains stimulatory, the RBI stands alone amongst the BRIC economies in pursuing tighter monetary conditions. China has paused on monetary policy tightening while Brazil and Russia have cut interest rates recently. While we think the RBI has done the bulk of its tightening work, we wouldn’t be surprised to see rates move up again in October.