India’s RBI expected to lower rates, while cautioning against inflation

28 Sep 2015 | Author: | No comments yet »

Dollar edges lower ahead of this week’s payrolls, China survey.

Mumbai/Washington: India’s biggest lender, State Bank of India (SBI), sees inflation below the Reserve Bank of India’s (RBI) target at year’s end, giving governor Raghuram Rajan room to reduce borrowing costs.Gold declined for a second day to head for a fifth straight quarterly loss on prospects for a rise in U.S. interest rates this year as Federal Reserve policy makers honed their message on the outlook for borrowing costs. The dollar held gains from its best week since July as investors look for further signs that the U.S. economy is strong enough for the Federal Reserve to raise interest rates by the end of this year. Bullion for immediate delivery lost 0.7 percent to $1,137.73 an ounce at 3:03 p.m. in Singapore from $1,146.20 on Friday, when it closed 0.7 percent lower, according to Bloomberg generic pricing.

Thursday’s China Caixin Purchasing Managers’ Index (PMI) and U.S. non-farm payrolls on Friday could give the greenback a lift if upbeat results strengthen the case for a rate hike this year. Junya Tanase, chief foreign-exchange strategist at JPMorgan Chase & Co. in Tokyo. “There are U.S. data and Fed officials speaking this week, but stocks dictate in the near term, with the yen being bought when equities decline.” Japan’s Topix share index slumped 1 percent as more than 1,000 companies traded without the right to a dividend, while the MSCI Asia Pacific Index slid 0.3 percent. This time majority of participants are hoping for 25 basis points cut in key lending rate on the back of cooling inflation and status quo by US Fed, which has given room for the RBI to cut short-term lending (repo) rate in its fourth bi-monthly monetary policy review on Tuesday. Thirty seven of 45 economists in a Bloomberg survey predict a quarter-point cut, with seven forecasting no change and one anticipating a 50 basis-point reduction. Continued improvement in U.S. employment conditions as well as signs of stabilization in the recently slowing Chinese economy could help convince the Fed to raise rates for the first time since 2006. “We have two big events this week.

The data on Wholesale Price Index (negative 4.9 per cent) and Consumer Price Index (3.66 per cent) continue to reflect a benign inflationary environment, said ratings and research firm India Ratings. Chinese data now seems to be classified in the payrolls category of events,” said Mitul Kotecha, head of Asia-Pacific FX strategy for Barclays in Singapore.

St Louis Fed chief James Bullard floated on Friday the possibility of an increase as soon as next month after Chair Janet Yellen said she saw a case for tightening policy in 2015. Jaitley had said inflation is “very much under control” and the country is better prepared than most emerging economies to weather the global economic turbulence. Since then, a string of Fed officials, including Janet Yellen herself last Thursday, has assured markets that the bank is still on track to normalize policy this year.

YES Securities: Nitasha Shankar, vice-president, research, YES Securities, said, “With inflation continuing to trend downwards there are expectations of a rate cut by the RBI in its upcoming policy meet. Kansas City Fed President Esther George on Friday said she believes the Fed should act soon so that it will “have the luxury” of being able keep rate hikes gradual. “With a further nine Fed speakers scheduled for this week,” analysts at ANZ wrote in a note to clients, “Fed policy – and its impact on broader markets – will no doubt remain at the forefront of the markets’ mind.” The consolidating dollar saw commodity currencies recover some ground. Consumer price inflation, the monetary authority’s benchmark, eased to 3.66% in August from a revised 3.69%—below target for a 12th straight month. Weak commodity prices have also helped India, she said. “Having started out as an inflation warrior, I think governor Rajan would really like to ensure that inflation is put down once and for all,” she said. In the United States, the shock resignation of House Speaker John Boehner and his comments on Sunday that Congress will avoid a government shutdown this week potentially remove one source of investor anxiety.

Even as monsoon rains have disappointed, aggregate food inflation has remained contained and CPI inflation is likely to undershoot the RBI’s near-term target due to lower oil prices. Rajan’s fight against rising prices has done little to lower household inflation expectations, which the central bank flagged as a crucial part of bringing inflation to its medium-term target of around 4%.

Household expectations of where inflation will be in a year hit more than 10% in June from as low as 8.9% in December, according to a central bank survey published on 4 August. Additionally, external demand has worsened in the last few months, which along with weaker monsoon rains suggests some downside risk to the growth outlook. However, the agency said that uncertainty created by US Federal Reserve’s status quo may limit aggressive rate cuts and offer some protection against volatility.

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