What is to be expected when the Reserve Bank of India (RBI) meets on December 18, 2013?

The Indian Government released some economic statistics on December 12, 2013 that points to slower industrial production, and higher inflation at the consumer level. Manufacturing output for the month of October 2013 fell to negative (1.97) percent, compared to the previous month level of 0.57 percent, while industrial output fell to a negative (1.81) percent, compared to the Reuters estimate of negative (1.20) percent, and a rise of 1.96 percent during the same period last year. India’s Consumer Price Index (CPI) for the month of November 2013 showed a year-over-year (yoy) rise of 11.24 percent, as compared to the previous month of 10.17 percent rise. Thomson Reuters estimates called for a rise of 10.00 percent during the same month.

The latest set of economic data has indicated the relative weakness of the Indian economy, combined with higher prices. The Reserve Bank of India (RBI) is scheduled to meet on December 18, 2013, and analysts will be keenly watching how RBI Governor, Mr. Raghuram Rajan and his colleagues plan to tackle the high inflationary numbers, combined with the slower than expected economic growth expectations of between 4.8 to 5.0 percent in 2014.

According to a December 13, 2013 Bloomberg Online News article, it reported that Governor Rajan was quite concerned about the slowing manufacturing output growth, and the rise in consumer prices. The Governor was speaking to journalists who were present for an event in Kolkata after the data was released. In his remarks, Governor Rajan indicated that he was quite uncomfortable the weak growth and inflation levels were higher than what was anticipated. Governor Rajan went on to say that he hoped to see a return to more normalised growth levels, combined with low inflation numbers going forward.

The official repurchase rate currently stands at 7.75 percent, and it comes after Governor Rajan, together with the RBI officials have raised rates by 50.0 basis points (bps) since he took office in September 2013. The slowing industrial output growth, combined with the increase in prices across the board, has increased the likelihood that the RBI is poised to issue a rate hike, possibly another 25.0 bps to 8.00 percent. Investment Bank, Goldman Sachs (GS) expects that Governor Rajan will boost the repurchase rate to 8.5 percent in 2014. According to a Bloomberg News survey, eight of the ten economists expect the RBI to leave the repurchase rate unchanged, while two expect to see a 25.0 bps rate hike. Governor Rajan has also been quoted that the RBI is aware of the weak economy, but the role of the central bank has to maintain general price stability in order to ensure market confidence is not eroded. The recent comments made could be a signal that the Governor might act sooner than anticipated in reining in on the relatively high inflationary numbers, and slowing growth across the board.

Along with the various rounds of interest rate hikes, combined with the weak growth and higher consumer prices, the question now turns to whether the various rounds of interest rate hikes announced by Governor Rajan and his colleagues since September 2013 has positively impacted the general economic fundamentals of the Indian economy. This question is difficult to address as there are challenges posed by the current weak Indian government where Prime Minister Manmohan Singh is trying to manage the various factions in the government, and corruption remains rampant across the government sectors. The general elections are scheduled for April 2014, where it is widely expected that the ruling Congress Party might suffer its worst electoral defeat after many years in power.

The various events took place this week, along with uncertainties over what the US Fed might do with its bond purchase programme, have resulted in the paring down of growth forecasts by many economists, and the Indian Rupee currency hitting its lowest levels. According to Bloomberg news, the currency fell approximately 12.0 percent against the US dollar in the last 12 months to 61.83 at the close of trading. In addition, the S&P BSE Index (SENSEX) index fell 12 percent. The yield on the 10-year government bond maturing November 2023 rose to 8.85 percent from the 8.83 percent expected. There is no sign of a let up, given that investors are jittery over the direction of the US Fed policies, and have since pared down most of their emerging market exposures earlier in anticipation of more weaknesses coming from these emerging economies.

The latest set of economic data has resulted in the continued bearishness among investors over India’s long-term economic fundamentals. Governor Rajan has taken a slew of measures in order to tame inflation, and boost the growth of the Indian economy since taking office in September 2013. Although the Governor holds high esteem and respect coming from the investment community, it is still an ongoing challenge when it comes to dealing with the weak Indian government, where government officials could not seem to get their acts together in reviving the Indian economy, allow greater access to its domestic sectors of the industry, and restore electoral confidence. It will be interesting to watch how will the outcome of the upcoming Indian general elections scheduled in April 2014 impact the overall economic fundamentals in the country. Many felt doubtful that it is going to make much of a difference as it will also just be another round of the so-called ‘musical chair rotation’, with no major impacts on the overall direction of the Indian economy.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc