Surprise, India Hikes; More to Come

India surprised the market by announcing a 25 bp hike in key rates today. This brings the repo rate to 5% and the reverse repo rate to 3.5% To the extent there was speculation of a rate hike, it was more about China than India. That said, India had raised reserve requirement earlier this quarter and many understood a rate hike was a question of time. We had thought early Q2 was a more likely scenario. Today's move probably is in addition to the hike we expected in Q2 not instead of it.

The Indian economy appears to be expanding at a healthy clip and price pressures are rising. Exports are growing (+11.5% year-over-year in January), but the central bank emphasized domestic variables in explaining the hike today.

India joins only a handful of countries who have raised rates; Israel, Australia and Norway. While Norway could raise rates again as early as next week (but some disappointing data and strong NOK makes it a close call), the next batch of countries to join the tightening club could include China, South Korea and Brazil. Among the industrialized countries, Sweden and Canada are likely candidates for early Q3 and New Zealand by not be far behind.

India's stock market has been a laggard this year. It has outperformed Shanghai, it is up less than 0.70% and is among the weaker Asian markets. That said, foreign inflows into Indian stocks have surged this month after a flattish Jan and Feb.

For its part the dollar has fallen about 3.3% against the rupee since Feb 8, but now appears to be basing in front of INR45.30. If we are right and today's hike is just the first in the cycle, the appetite for risk remains healthy, and foreign investors continue to be attracted to Indian assets, the dollar could slip toward INR44 in by the end of Q2.
Surprise, India Hikes; More to Come Surprise, India Hikes; More to Come Reviewed by Marc Chandler on March 19, 2010 Rating: 5
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