India’s inflation eases to 4.6% in September

CPI reached just 4.6% YoY in September (down from 4.8% in August) and it is starting to look likely that the figures for the remaining months of this year will be below 5.0%. Core inflation dipped back to 4.9%, coming off from 5.1% in August.

Sequentially, headline inflation remains benign, with the average seasonally-adjusted rate for the last six months running at 0.3% MoM, down from an average of 0.6% in 2H10. The overall CPI numbers have also been flattered by the fact that commodity prices have eased in recent months. The slow creep up in core inflation is also not an immediate cause of concern.

Against the backdrop of benign inflation and mounting concerns on global growth, the probability of further monetary easing in 4Q has risen significantly. During the previous monetary policy meeting on September 8, the central bank sounded a decidedly dovish note and opted to lower the floor of the interest rate corridor for monetary operation (an implicit form of monetary easing).

Since then, confidence in the global economy has taken a sharp dip for the worst and this has also been reflected in the selloff in the Jakarta Composite Index and the rupiah over the last three weeks. Currently, BI is expected to hold the policy rate at 6.75% for the rest of the year, but other tools such as tweaking the reserve requirement ratio or a further adjustment on the interest rate corridor cannot be ruled out. If sentiment worsens, a follow through with the policy rate is also possible, although that must be weighed against the risks of further portfolio outflows.