India/Indonesia rates: Diverging inflation

Asian Rates: Bond yields capped in Indonesia, supported in India
Duncan Tan27 Oct 2021
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    India and Indonesia’s consumer inflation rates are likely to diverge in the face of the recent rally in commodity prices, primarily oil/gas. 

    For India (discussed here), domestic fuel retailers resumed price increases after a hiatus, which has led to high oil prices. We estimate that every  $10/barrel move in oil prices results in 30-40bp change in the headline CPI (and bigger on WPI), amplified further as higher transportation costs seep into food and inflationary expectations. Coal’s weight in the retail CPI basket is negligible and modestly higher (2.1%) in the wholesale price basket, but the indirect impact is magnified via input prices through manufacturers and utility tariff increases (if undertaken).

    Oct-Nov21 CPI inflation is likely to provide transient relief on base effects, but head back towards 6% yoy in 1Q22 on high energy prices, input price pressures, reopening of service sectors, delayed rains pushing up staples and receding base effects. This will add to the buoyancy in rates/yields on policy normalisation trades just as pricier imports weigh on the currency (in addition to the bid US$).

    The increase in non-oil commodities is beneficial toIndonesia’s terms of trade and fiscal revenues, while impact of oil (being a net importer) is under watch. Year-to-date CPI inflation has averaged 1.5% yoy, below the BI’s 2-4% target, on demand compression and softer food. Higher oil/ gas is unlikely to translate into higher inflation in the near-term owing to inbuilt shock-absorbers, by way of only a partial passthrough of higher oil prices (subsidized low-grade fuels i.e., below RON92), fixed electricity tariffs (for smaller households) and fixed price procurement agreements for part of the oil/ gas supplies. 

    With economic output still below pre-pandemic levels, energy price adjustments are not imminent, even as the fiscal strain might show with a lag. Energy subsidies (fuel and electricity) fell from over ~3% of GDP in 2013-14 to sub-1% of GDP last year, before poised to edge back up this year-2022. However, this will not carry adverse impact on the fiscal math (see here). With little imminent impact on inflation on the cards, we maintain our call for the BI to remain on extended pause, whilst firmer fiscal math keeps a lid on 10Y yields. US Fed’s taper plans and consequent volatility will be under watch.


    Radhika Rao

    Economist – India, Indonesia, Thailand & Eurozone
    [email protected]

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