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    India: Room for Rate Cut Despite Inflation Spike

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 13, 2019

    India’s central bank might look through headline inflation surprise, as core price pressures remain contained. Chile remained under pressure, with markets getting increasingly concerned about a populist policy overhaul.

    It’s “inflation up, growth expectations down” in India, with ensuing questions about the central bank’s response function.
    Indeed, yearly headline inflation jumped unexpectedly to 4.62%, breaching the mid-point of the target range (and generating a bunch of alarming headlines along the way). However, the increase was mostly due to higher food prices, which should be transitory (and most likely will be looked through by the central bank). In addition, core prices dropped further in October (see chart below), reflecting softer domestic demand and opening the door for another rate cut in December.

    Is the “Miracle of Chile” in more trouble than initially thought? The selloff deepened this morning as riots continued, but the administration remains “tone-deaf,” insisting that a new constitution should be drafted by the congress, whereas the mood on the street is that it should be done by a constitutional assembly. There is chatter about currency interventions and the use of the stabilization fund to minimize the direct fiscal impact. The biggest concern right now is that the crisis will result in a populist overhaul of Chile’s economic model, sending a negative signal to the rest of the region (which seems to be quite receptive at this point in time).

    Brazil’s domestic activity continues to reap the benefits of lower policy rates (check today’s retail sales). However, domestic politics raise some concerns whether authorities would have enough bandwidth to focus on pro-growth reforms. In the latest twist, President Jair Bolsonaro decided to create a new political party (“Alliance for Brazil”), targeting next year’s municipal elections and, ultimately, the 2020 presidential election. The news was a bit disconcerting against the backdrop of yet another delay in the presentation of much-needed administrative reform and other structural measures.

    Chart at a Glance: India’s Core Price Pressures Continue to Abate

    India Core CPI ex Food, Fuel and Light

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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