Rising oil portends long pause as India prepares for rate review

By Anirban Nag on 11/13/2017

MUMBAI (Bloomberg) -- The Indian central bank’s hawkish inflation forecasts may finally be coming true.

After long undershooting its predictions, data on Monday showed consumer prices rose the most in seven months. The pace may only accelerate due to rebounding global oil prices, dashing any hopes of an interest-rate cut as the Reserve Bank of India seeks to burnish its inflation-fighting credentials.

Brent crude has surged more than 30% since June to nearly $65/bbl. That’s helped push the probability of an increase in borrowing costs at the RBI’s Dec. 5-6 meeting to 44% from just 2% a month ago, based on overnight index swaps data compiled by Bloomberg. While most economists surveyed don’t see any tightening, some are reining in calls for easing.

"If Brent price averages around $60/bbl in fiscal 2018, the macro-stability risks will widen but will still be manageable," said Tanvee Gupta Jain, a Mumbai-based economist at UBS AG. "The monetary policy committee would prefer to go in for a prolonged pause," she said, compared with her prediction of a 25 basis point cut.

A jump to $65 could add 30 basis points to annual inflation and a key measure of growth may weaken by 15 basis points, the RBI estimates. It currently forecasts inflation at 4.2% to 4.6% in the second half of the year through March 31, above the 4% medium-term target.

India’s CPI rose 3.6% in October from a year earlier, exceeding the median 3.4% estimate in a Bloomberg survey. It could have been higher but for a cut in taxes on gasoline and diesel, prompted by a public outcry last month as costs surged.

Not much room

The RBI’s six-member MPC kept the benchmark rate unchanged in October and minutes of the meeting showed senior officials, including Viral Acharya, the deputy governor in charge of monetary policy, didn’t see “much room for monetary-policy adjustment.” That was a change from his decision to vote for a rate cut in August, which raised questions about the RBI’s own inflation forecasting tools.

Even so, economists including those at Credit Agricole SA and HDFC Bank Ltd. were holding out for a cut to 5.75% from 6% -- as recently as last month -- to spur flagging growth.

Focus will now shift to gross domestic product data, due Nov. 30, which is expected to show the pace of expansion recovered to 6.6% in July-to-September from a three-year low of 5.7% the previous quarter. Signs of a recovery could also make it tougher for the RBI to cut rates.

"We do not see room for monetary policy accommodation," said Teresa John, an economist at Nirmal Bang Equities Pvt.

Market pricing

The RBI’s review comes as the Federal Reserve, Bank of England and Bank of Canada raised rates this year, squeezing returns for investors in emerging-market assets. India’s monetary authority has signaled its tightening intent by mopping excess funds from the banking system over the past few months, pushing down bonds.

The yield on the benchmark 10-year sovereign note has risen 11 basis points this month and closed at 6.97% on Monday, before the inflation data was published. The rupee ended 0.4% weaker at 65.43 a dollar and the one-year swap rate was at 6.23%.

"The market has started pricing out further monetary easing expectations, likely due to the recent rise in oil prices," analysts at Nomura Holdings Inc. wrote in a report on Monday, reiterating their call of no change in India’s policy rate through 2018. "That said, if oil prices continue to rise, the market could continue to price in hikes."


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