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Sliding CPI Will Make Raising Rates a Difficult Decision for the RBI
The Reserve Bank of India passed on raising rates the last time it met, and it
will face a tough decision at its next meeting on December 5. Coming into this
week, most expected that the RBI would raise rates
at its December meeting, but declining oil prices could ease inflation in
November, keeping the RBI on the sidelines again. Consumer inflation for October
was weaker than expected, but industrial output was robust, which could force
the central banks hand.
Consumer Price Inflation Was Softer than Expected
Indian CPI came in at 3.3% in October which was softer than the 3.6% expected by
economists and compares to the 3.7% increase in CPI seen in September. The
softer than expected number was driven by a decline in good inflation which
declined by 0.86% in October which compares to the 0.51% increase seen in
September. Fuel inflation increased slightly to 8.55% compared to 8.47% in
September, but a 20% drop in crude oil prices in November will likely ease fuel
inflation. Housing inflation also slipped dropping to 6.5% in October compared
to a 7.1% rise in September. Clothing which includes footwear dipped increasing
by 3.5% compared to 4.6% in September. Core inflation which excludes food and
energy came in at 6.1% year over year.
Currently the 3.3% increase in headline inflation is below trend which is
approximately 4%, and the current target of the India Monetary Policy Committee.
If inflation continues to track these levels it will be hard for the RBI to
raise rates with below trend inflation.
Additionally, rural inflation negatively accelerating faster than urban
inflation, which could point to weakness in rural demand. Rural inflation fell
sharply to 2.8% compared to 3.3% in the previous month. You can follow India’s
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Indian Industrial Production Was Stronger Than Expected
Indian Industrial production was stronger than expected with output rising more
in September despite a decline in the Rupee. This IP lags, which means that
higher fuel prices increased costs and weighed on IP. The decline in oil prices
in November will buoy output.
India reported that the index of
Industrial Production increased by 4.5% in
September on a year over year basis. This compared to a 4.1% increase in
September of 2017. Expectations were for a 4.3% increase in IP in September. The
August industrial production number was revised higher to 4.7% compared to the
prior release which showed a 4.3% increase. Mining output, which is also
incorporated into the Industrial production number increased by 0.2% year over
year compared to a robust 7.6% increase in September of 2017. Manufacturing
output increased by 4.6% compared with last year’s growth of 3.8%. Electricity
generation growth stood at 8.2% compared with a 3.4% rise last year.
The combination of the stronger output and lower inflation is a recipe that is
perfect for long term growth. The question for the RBI is whether stronger
output will lead to higher inflation level, and push the central bank behind the