India Poised to Tighten Again Tomorrow

India's central bank meets tomorrow and the risk is asymmetrically biased toward continued tightening of monetary conditions. Generally speaking, following the intra-meeting move last month, most expect India's central bank to hike key short-term rates by 25 bp. However, the risk is that officials take stronger action. This could take the form of a 50 bp hike and/or another increase in required reserve ratios.

Currently, the reverse repo is set at 3.5% and the reverse repo rate at 5.%. The reserve ratio stands at 5.75%.

Consumer inflation in India is among the highest in the G20 with urban CPI running just below 15% in Feb year-over-year, and wholesale price inflation at near 10%.

India typically experiences rising price pressures earlier in its business cycle because it has a poor job expanding capacity. In particular, it under-invests in infrastructure and this in turn creates inefficiencies, bottlenecks and price pressures.

Meanwhile, foreign investment in Indian equities continues to appear relatively robust. Official data from the stock exchange reports inflows in the first half of this month at about $1.2 bln, which almost double the pace seen in Q1.

The US dollar has fallen about 5.75% against the INR since the greenback's upside correction ended in early Feb. However, the dollar appears to be carving out a low near INR44.15-20. A move now above INR44.77 could signal a move toward INR45.20-50.