Reserve Bank of India likely to remain dovish on weak fundamentals

Indian industrial production for August and consumer price index inflation for September is set to be released this week. Industrial output is expected to remain subdued with another contraction anticipated for the second straight month on a year-on-year basis, said Commerzbank in a research note.

In the initial seven months of 2016, production stayed flat, down from a moderate 3.3 percent last year. This shows subdued investment spending and investor confidence. Currently, consumer spending is predominantly supporting the Indian economy.

On the inflation front, the CPI is likely to have slowed further to below 5 percent year-on-year in September from the recent high of 6 percent in July. The deceleration is anticipated to be from lower food inflation because of good monsoon, stated Commerzbank. In all, the data to be released this week would strengthen a dovish RBI.

“We look for another 25bp cut to 6 percent at the last meeting for this year on 6-7 December. For USD/INR, RBI is likely to continue to favour stability”, added Commerzbank.

This is witnessed from the INR on a trade weighted basis that has stayed the same since April and dropped just 1.6 percent year-to-date. The Indian rupee is moving consistently with the currencies of its major trading partners, according to Commerzbank.