Headline wholesale price inflation for December dropped to 6.16% from 7.52% in November, led by sharp moderation in food inflation. Core inflation marginally inched higher towards 2.8/3% level, but still low, in line with the weak economy.
Over the month of December, there has been a sharp decline in both retail as well as wholesale inflation, which in turn has helped cool the long bond yields. Sensing a near term peak in inflation, FIIs have poured over USD 600 mn into debt segment, last week. We continue to expect robust inflows in the debt markets. As a result, Indian rupee can remain well supported closer to 61:80/62:00 levels. At the same time demand for hedges from importers as well spot demand for FCY from oilers will also cap gains in the rupee beyond 61:00/60:70 on spot.
We need to keep an eye on the risk sentiments, as reversal of upward trend in equity and credit markets can become a positive catalyst for US dollar and the Japanese Yen.
We welcome the decision from RBI to allow greater flexibility to corporates in terms of cancellation and rebooking. We now hope RBI will also relax the position limits placed on exchange traded market as we had argued in the past that the step is counterproductive. As outlined by Dr Raghuram Rajan through his numerous writings and speeches, that India needs a deep and liquid financial market and an important step in that direction remains a well-functioning free market.