Sunday, February 12, 2012

India awaiting the latest WPI print

The Reserve Bank of India (RBI) is looking for some wind in its sails. They know India needs a rate cut to avoid a material slowdown that could be caused by high rates the RBI has been maintaining to fight inflation. That is why this Tuesday's Wholesale Price Index (WPI) print is so important. It needs to drop below 7% (consensus is 6.7) for the RBI to get sufficiently comfortable with the moderation in the inflation rate.

India's WPI (Bloomberg)

The currency has strengthened considerably lately, giving INR some room to maneuver. It would be far more difficult to lower rates in the face of a weakened currency, which hit close to 54 rupees per dollar late last year.

USD-INR exchange rate

Tuesday's number is particularly important because core inflation has been stubbornly high.
JPMorgan: One worrying part of the upbeat PMI readings from India has been that output prices, which are a good leading indicator for non-food manufacturing (core inflation), stayed well above 50, while input prices continued to increase sequentially, reaching 63.4. If the sequential momentum of inflation does not abate soon, then over-year-ago inflation rates will start to rise in April.
A surprise to the upside could have negative consequences for India's interest rates, equity markets, and consequently growth expectations.
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