Time for policy inflection

Most investors believe emerging market central banks must follow the Fed. If they don't, interest rate differentials can lead to significant capital flows and currency fluctuations.

- SONAL VARMA

Indeed, the Fed's pivot to easing in September has opened the policy floodgates. In Asia, the Bangko Sentral ng Pilipinas cut the policy rate by 25 basis points (bps), and the reserve requirement ratio (RRR) by 250 bps, Bank Indonesia surprised with a 25-bp rate cut, and the People's Bank of China cut the RRR by 50 bps, and the seven-day open market operation reverse repo rate by 20 bps. Is the Reserve Bank of India (RBI) next?

There's no doubt a lower Fed rate hurdle helps, but, unlike other central banks, the RBI's large foreign exchange reserves give it more leeway to focus on domestic considerations. In our view, it is the shift in the domestic growth-inflation balance since the August policy meeting that calls for a policy recalibration.

A more favourable inflation outlook

The outlook for food inflation looks more promising. A good kharif harvest and favourable rabi prospects bode well for the output and prices of rice, wheat, and pulses. High-frequency data shows a sequential fall in most food prices in August and September, although a surprising wedge has opened up between food prices as reported in the consumer price index (CPI) and those reported by the Department of Consumer Affairs, which appears to be a statistical anomaly.