South Asia Monetary Policy: India July WPI And CBSL August Hold

India: Inflation Concerns To The Fore?

Widely surpassing market expectations to the upside, Indian wholesale price inflation (WPI) spiked up to 5.8% year-on-year (y-o-y) in July from 4.9% in June, adding further pressure on the Reserve Bank of India (RBI) to adopt a tighter stance on monetary policy despite the economy's still-subpar performance. The central bank is already under intense pressure to enact further tightening measures to stabilise the rupee. From our perspective, July's WPI surge is unlikely to be of much concern to the RBI as the country's macro environment remains very much disinflationary. Therefore, we continue to see the benchmark repo rate remaining steady at 7.25% until end-FY2013/14 (April-March). Taking a closer look at the latest inflation numbers, it is worth noting that core (manufactured products) inflation remained unchanged at a multi-year low of 2.8% y-o-y. Crucially, broad money supply (M3) growth remains weak, suggesting that a generally subdued price environment should persist.

Not Worried About The Uptick
India - Wholesale Price Inflation, % chg y-o-y

Sri Lanka: Mounting Pressure For Further Easing

Despite the Central Bank of Sri Lanka (CBSL)'s decision to keep its benchmark policy rate unchanged for its August monetary policy review, we continue to believe that further easing will take place in the coming months as the island's economy struggles to maintain momentum and as inflation remains benign. To be sure, even though the CBSL chose to hold in its most recent meeting, the monetary authority still maintained an undoubtedly dovish tone, stating that 'there is yet more space for market lending rates to decline further' and that the 'reduction of lending rates on medium-to-long term credit facilities thus far, has been inadequate'.

Still In Dire Straits
Sri Lanka - Private Sector Credit & Industrial Production, % chg y-o-y

We continue to see the central bank lowering its benchmark reverse repo rate by 50 basis points (bps) to 8.50% by year's end. With consumer price inflation (CPI) having eased to a 16-month low of 6.1% as of July and with core inflation at historic lows, the economy's ongoing struggles will continue to be the central bank's main focus. Indeed, the latest data showed the contraction in industrial production deepening once again (to -7.2% y-o-y in May), while private sector credit growth has continued to slow, coming in at just 8.9% y-o-y in June - a mile away from the 35.2% peak registered in March 2012.

This article is tagged to:
Sector: Country Risk
Geography: Asia, Asia, India, Sri Lanka, Asia, Asia, Asia, Asia

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