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Consumer prices in India are likely to taper off from July’s two-year highs of 6.1 percent during the month of August, following lower food price pressures and decline in retail fuel costs. This moderation is likely to extend into 4Q16, which is anticipated to open the door for further easing late-2016.
As it stands, India’s inflation differentials with the rest of its trading partners have been widening. This can be inferred in the growing gap between the rupee’s real and nominal effective exchange rates. The spread has particularly widened since the start of this year, when India’s inflation prints began to edge north. This is in contrast to G3 economies who are struggling to lift inflation, while price pressures have surprised to the downside in many regional economies, including China, Singapore, Indonesia and Philippines, DBS reported.
This gap should begin to narrow towards later this year as India’s inflation prints moderate. Nonetheless, real rupee strength fuelled also by the wider inflation differentials and broadly weaker US dollar on receding Fed hike expectations, will see the authorities keen to limit one-sided appreciation in the rupee against the greenback and be in sync with the regional players.
Further, low volatility, attractive yields, positive reform momentum and favourable growth prospects have been the main draw factors as foreign equity inflows topped $6bn year-to-date, while debt outflows moderate.
Despite these strong flows, the authorities’ presence has kept the Indian rupee as amongst the worst performers in the region on year-to-date basis, along with the CNY/CNH. Any potential disruption from FCNR maturities that start this month will also be kept in view.
Meanwhile, the new Governor of the Reserve Bank of India, Urjit Patel, assumed office on Sep 5, Monday and markets will wait to watch his moves as he takes charge to complete former Governor Raghuram Rajan’s deep surgery of the economy. However, the formation of the monetary policy committee is expected to be completed ahead of October’s policy review.
