WWRR Vol.2.015

India Economics
“Strong growth to continue for a while yet” 11 th
October.) Capacity utilisation rates are at their
highest in over seven years (see Chart 3), and with
growth still strong they are likely to rise further.
Chart 3: Capacity Utilisation (Net % of Respondents)
20
10
0
-10
-20
-30
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: CEIC
Expectation For Next Quarter
Current Quarter
In turn, this will keep core price pressures elevated.
Indeed, looking beyond the headline consumer and
wholesale price data, underlying price pressures
have continued to build. (See Chart 4.)
10
8
6
4
2
0
-2
Chart 4: Core Inflation (% y/y)
Above normal
-4
2014 2015 2016 2017 2018
Sources: CEIC, Capital Economics
In addition, several MPC members have expressed
concerns about the rise in household inflation
expectations over recent quarters. (See Chart 5.)
12
11
10
9
Chart 5: Household Inflation Expectations (%)
8
Current
7
Three Months Ahead
One Year Ahead
6
2015 2016 2017 2018
Source: CEIC
Below normal
Consumer Price Measure
Wholesale Price Measure
20
10
0
-10
-20
-30
10
8
6
4
2
0
-2
-4
12
11
10
9
8
7
6
Hanging over all of this, the MPC has placed great
emphasis on ensuring that it doesn’t drop behind the
curve and lose credibility as a result. For example,
Dr Chetan Ghate warned that “if there is substantial
deviation of inflationary expectations in relation to
the target, by failing to react with the policy interest
rate, we will lose credibility and reduce our capacity
to influence expectations”.
Linked to the issue of credibility, there is likely to be
some concern among MPC members over the
disputes between the RBI and government that have
recently come to light. Though relations appear to
have turned more amicable over the past week, we
don’t think that the issues have been put to bed. (For
more see our India Economics Update, “RBI and
government signal tentative truce”, 20 th November.)
On balance, this may cause the RBI to hike interest
rates further if it feels inclined to re-emphasise its
independence.
For what it’s worth, we think that the swiftness with
which the RBI has already responded to the recent
rise in inflation will help to anchor inflation
expectations and prevent the need for aggressive
policy changes in the future. (See our India
Economics Focus, “Inflation rise tests the RBI’s
credibility”, 29 th June.) But we don’t think its work is
fully done yet. We are forecasting one more 25bp
increase in the repo rate to 6.75% in this cycle. (See
Chart 6.)
Chart 6: RBI Policy Rates (%)
10
10
9
CE
Forecasts
9
8
8
7
7
6
6
5
5
4
4
3
3
2
Repo
2
1
Reverse Repo
1
0
0
06 08 10 12 14 16 18 20
Sources: CEIC, Capital Economics
Reserve Bank of India Watch Page 2