Although there is room for the RBI to reduce rates by 25bps in the December meeting, it may not take place, especially with concerns over the GDP and inflation trend in which the MPC members could seek greater clarity. In October, inflation rose to a seven-month high of 3.6% y/y due to higher food and fuel prices.

Looking ahead, higher oil prices and the weakening trend exhibited by the Indian rupee could potentially exert inflationary pressure. If the depreciating trend of the rupee continues, it is likely to add pressure on the imported inflation components. Such scenario may delay the rate cut to 1Q2018. We project the rupee to average at 65.21 against the USD in 2017 while the end period is forecasted at 15.65.

• Retail inflation rose to a seven-month high in October due to the quicker gain from both food and fuel product prices. The headline inflation climbed by 3.6% y/y from 3.3% y/y in September with food prices up 1.9% y/y and fuel jumping by 6.4% y/y.

• Meanwhile, the core inflation stayed at 4.6% y/y for the second consecutive month as the higher rent allowance for government employees was negated by a decline in retail transportation costs.

• Excluding the housing index, core inflation moderated to 4.0% y/y from 4.2% y/y in September, suggesting that the demand side pressures remain modest. It is not surprising as data like manufacturing PMI, car sales, and bank credit is growing sluggishly.

• The Reserve Bank of India (RBI) reduced the policy repo rate by 25bps to 6.00% and kept the reverse repo rate at 5.75% in August. The rate cut, first time in 10 months, is expected to make home loans cheaper as interest rates are likely to come down.

• We believe that though there is room for the RBI to reduce the repo rate by another 25 basis points during its December 6 meeting, it may not take place, especially with concerns over the GDP and inflation trend in which the MPC members could seek greater clarity.

• More so with potential inflationary pressure likely to come from higher oil prices and the weakening trend exhibited by the Indian rupee. If the depreciating trend continues, it is likely to add pressure on the imported inflation components. Such scenario may delay the rate cut into 1Q2018.

Source: AmInvest Research - 16 Nov 2017