MUMBAI- A sustained fall in India’s core retail inflation and subdued inflationary pressures could prompt the central bank’s rate-setting panel to ease its policy stance to ‘neutral’ as early as next month, economists said.
India’s monetary policy committee (MPC) has kept the key policy repo rate unchanged after raising it by 250 basis points (bps) between May 2022 and February 2023 to battle high inflation. The MPC has since April 2022 been focused on “withdrawal of accommodation” as part of its policy stance to ensure inflation aligns to its 4 percent target.
“There is a compelling case for shift in stance based on inflation outlook, global financial conditions, liquidity situation and real policy rates,” economists at ICICI Securities Primary Dealership said in a note.
“We attach a high probability that couple of external members (of the rate-setting panel) may vote for such a shift in the next meet.”
The rate-setting panel meets next on Feb. 6-8.
India’s headline retail inflation accelerated to 5.69 percent on year in December from 5.55 percent in the previous month, but core inflation, which strips out volatile food and energy prices, fell to 3.8 percent -3.9 percent from 4.05 percent -4.2 percent in November, according to economists.
Core inflation has moderated to a near-four-year low, despite solid economic growth and repeated supply-side food shocks, Nomura said, pegging headline to fall to around 5 percent in January and core inflation to 3.5 percent .
Nomura expects the MPC to cut policy rates by 100 basis points between August and March, with risks skewed towards earlier rate cuts.
Economists at Citi said that while their base case for a change in stance is the April meeting, February has now become a “live policy”.
“Possibility of a change in monetary policy stance to neutral was discussed in the December MPC meeting itself and highlighted by the external members,” the economists said.
“A sustained fall in core inflation is likely to make those voices louder in the February meeting.”
Meawhile, net inflows into exchange traded funds (ETFs) tracking Indian stocks hit a record high in 2023, with analysts optimistic that investors will continue to buy into the world’s fastest-growing major economy even as keenly watched general elections loom.
India-focused ETFs saw net inflows of $8.6 billion last year, according to data by Morningstar Direct, beating the $7.4 billion peak in net flows in 2021.
Analysts see the trend continuing in the run-up to general elections due by May and beyond, with Prime Minister Narendra Modi expected to be re-elected for a rare third term.
“The strong inflows suggest that investors do not see the upcoming election as a political risk,” said Tom Bailey, head of ETF Research at HANetf, contrasting India to Taiwan where approaching elections had prompted European investors to pull $91.6 million out of Taiwan-linked ETFs in 2023.
Argentina also saw sharp fund outflows in the run-up to presidential elections as investors braced for heightened political volatility.
Indian shares, on the other hand, are at all-time highs and foreign portfolio investors made record monthly purchases of equities in December after Modi’s Bharatiya Janata Party (BJP) wrested control of key states from the opposition, adding to hopes of political continuity.
“We’d put strong inflows down to the broader growing optimism surrounding India’s economic progress and importance than simply the election,” Bailey said.
