The sharp depreciation of the Indian rupee in recent months, coupled with stubbornly high food prices, has contributed significantly to rising inflationary pressures and this was reflected in another rise in the wholesale price index (WPI) in August. The WPI rose by 6.1% (y-o-y) compared to 5.8% in the prior month and 5.2% in June. In a move designed to show its determination to tackle accelerating inflation, the Reserve Bank of India (RBI) surprised the markets last month by opting to raise its key policy rate by 25 basis points to 7.5%. As well as the rate increase, the central bank also started to roll back emergency liquidity measures which were put into place in July to support the ailing rupee. A moderate rebound in the currency in recent weeks has enabled the RBI to pursue such moves and policymakers are expected to continue to unwind the emergency measures. With the new governor, Raghuram Rajan, keen to display his inflation fighting credentials, some commentators have not ruled out a further rate hike later this year. Greater stability displayed by rupee of late stems from policymakers’ more credible policy response in recent weeks and the more positive flow of data releases. Investors reacted positively to a sharp narrowing of September’s trade deficit to US$6.76bn. The improvement came amid rising exports and a sharp drop in imports, particularly for silver and gold. Exports have now risen for a third straight month and the subsequent narrowing in the trade gap is a welcome relief. Adding to the positive external account data, September’s manufacturing PMI showed some improvement on the back of a pickup in output and new orders.
Meanwhile, real GDP growth projections have continued to slide for this year to 4.6% and forecasts for consumer and wholesale have deteriorated again.
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