Mitul Kotecha – Senior Emerging Markets Strategist at TD Securities (TDS) – expects the RBI to cut its repo rate by 25bps to 4.90% at its meeting on Thursday 5 December.

Key Quotes:

“The RBI will, however, have to balance continued weakness in economic data with a jump in inflation. On balance we think growth worries will take precedence over the recent rise in inflation, but higher inflation will prevent the RBI from cutting more aggressively than 25bp.”

“Until recently the RBI could cut rates without worrying about inflation as CPI had been well behaved. This all changed in October, with CPI rising to a 16 month high of 4.62% y/y, a jump of almost 1% m/m and above the RBI's medium term target of 4%. Surging food prices were the main culprit behind the spike though higher fuel prices also played an outsized role. Food and beverage price inflation rose 6.93% y/y, with vegetable prices rising at a 26.1% y/y pace, led by onion and tomato prices.”

“It was not all bad news however, core CPI (ex food, fuel and light) and core-core CPI (ex-food, all fuels, gold and silver) both moderated to multi-year lows, showing that broader price pressures remain well contained as the economy slows. While food prices will likely continue to exert upward pressure on headline inflation over the short term, we think the impact will be short-lived, leaving the RBI to focus on combating growth weakness amid a benign core inflationary backdrop.”

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