In India further interest rate cuts seem more likely following the recent sharper-than-expected decline in the Wholesale Price Index (WPI). WPI inflation fell to 6.0% y/y in March, down from 6.8% in February. Core inflation also continued to decline, falling to 3.5% y/y from 3.8% y/y over the same period.
I’ve written before about the tension between the Reserve
Bank of India (RBI) and the Government with the former looking for changes to
fiscal policy (subsidies) and structural goods markets reform to ease inflation
pressure with the latter looking for the RBI to do more work to support growth,
which at 4.5% in the year to December 2012 is below trend.
However, with WPI inflation now lower and growth looking
soft, there is more room for the RBI to move. However, we think the
RBI’s comment from their last statement still holds: “the headroom for further
monetary easing remains quite limited”. That’s particularly the case
given that CPI inflation remains in excess of 10%. We think there is room
for another 50 bps of easing with the next move likely to come at the policy
meeting on May 3rd.
In Brazil, the central bank recently raised the official Selic
rate by 25bps. With the Brazilian
economy slowing more sharply than we expected last year, the central bank eased
aggressively. The policy rate ended up
lower in 2012 than it was during the GFC downturn.
With that aggressive monetary response, we warned the
central bank would have to respond quickly to signs of emerging inflation
pressures. That seemed inevitable given
the near 20% depreciation in the Brazilian Real. While recent activity indicators have been
somewhat softer than expected, inflation has surprised on the upside.
The good news is the Bank is responding to the inflation
surprise. While we expect to see
interest rates move gradually higher in the period ahead, we are not expecting
an aggressive tightening in conditions.
At this point I’m still happy with my 2013 GDP growth forecast of 3.0%.