India’s subdued inflation signals RBI policy U-turn

Bloomberg

India’s headline inflation edging towards the lower-end of the central bank’s target band has opened the door to interest-rate cuts in coming months.
While rate swaps show investors are pricing no change in the benchmark repurchase rate for the next 12 months, the Reserve Bank of India may be forced to jettison its hawkish stance adopted five months ago for an easing bias.
The reasons: deceleration in economic growth, deferment of investments ahead of an election due by May and rising expectations of a global slowdown.
There’s also a new governor in office: Shaktikanta Das, who is seen as more dovish on monetary policy, was appointed to replace Urjit Patel after he unexpectedly resigned in December.
“A domestic cyclical slowdown is converging with a loss of global growth momentum,” said Sameer Narang, an economist at Bank of Baroda in Mumbai. Inflation-adjusted interest rates in India are already the highest in Asia, an indicator of policy tightness. The real rate rose to 4.31 percent after data showed consumer-price growth eased to 2.19 percent in December, in line with the 2.2 percent reading in a Bloomberg survey of economists.
The figures are the final price print before the Monetary Policy Committee’s next rate decision on February 7.
“A slowing economy suggests the central bank will surrender its stance of calibrated tightening at its February 7 policy review. We expect the RBI to cut the policy repo rate by 25 bps
and change its stance to neutral,” said Abhishek Gupta, Bloomberg Economics.