Inflation as measured by the consumer price index (CPI) and expected Reserve Bank of India (RBI) policy
How are the Indian and global economic environments affecting the financial markets?
India’s inflation as measured by the CPI has risen at an annual rate of 3.77 percent in September 2018 as compared to 3.69 percent in August 2018. Inflation continues to be below the RBI’s medium term inflation target of 4% with some softening of core (excluding food and fuel) inflation as well. Before the next (fifth) bi-monthly monetary policy statement of the RBI on December 5th, inflation reading for October 2018 would be released on November 12th. Also, India’s gross domestic product (GDP) data for the July-September quarter would be released on November 30th providing insight into economic growth. The RBI, consistent with its monetary policy stance of “calibrated tightening”, depending on the November reading of CPI inflation, may or may not raise the repo rate. If the October CPI inflation reading is benign as was also the case with August and September, with the rest of the macro variables such as current account deficit (CAD) and the rupee stabilizing, the RBI could choose not to tighten monetary policy because inflation continues to be below the lower end of its inflation forecast range of 3.9-4.5 percent in the second half of 2018-2019. To watch would be the budget deficit which could be inflationary by putting the government’s budget deficit target in jeopardy because of larger minimum support outlay by the government due to low food prices.
What to expect from the markets next week?
The markets will continue to react to the oil price, rupee, global cues on interest rates, and stabilization of the non-bank financial companies (NBFCs). This year, thus far, as we have predicted, given the domestic macro and sectoral situation and external environment, the Indian markets have sharply corrected down. We expect this downward pressure to remain especially given the outlook on energy prices (political situation with Iran and Saudi Arabia) and potential inflationary affects of higher energy costs. Strong corporate earnings for the July-September quarter could act to offset the downward pressure on the markets to some extent.