Indian Rupee: Rate Hike Bets Gain Support From Higher Inflation – DBS

A second consecutive rate hike in December is expected by DBS Group Research as the Consumer Price Index is likely to exceed the Reserve Bank of India’s (RBI) target range. Higher food costs and base effects are expected to push India’s headline inflation up in October, alongside an acceleration in core inflation. Softer precious metals prices and delays in fuel price changes could ease pressures on non-food components. DBS also forecasts a still-wide goods trade deficit.

Will higher food prices prompt an RBI rate hike?

"We expect headline inflation to rise to 6.0% yoy in October from 5.5% the month before, on higher food costs and a low base effect."

"High frequency data pointed to a further pick-up in sequential pressures in food segments, across cereals, edible oil, perishables (vegetables) etc."

"Non-food components should find relief from further moderation in precious metals and delay in passage of retail fuel price changes."

"Core inflation is nonetheless set to quicken to 4.5-4.6% as services notch increases and as indirect tax effects in the base, fall out of the equation."

"With inflation expected to test past the higher end of the RBI target range, we expect a second successive rate hike in December."

"The decline in oil prices has also led to cooling of overnight OIS rates as concerns over aggressive rate hikes have eased. Goods trade deficit is likely to stay wide at above $30bn in Oct."

(An editor reviewed this article, which was created with the assistance of an Artificial Intelligence tool. Learn more.)