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Bank Indonesia will hold its monthly rate review today. The central bank has frontloaded policy easing measures, in sync with the government’s moves to support growth, by undertaking three consecutive cuts between July and September. We expect this month’s decision to be a close one, with a slightly more than even chance for a fourth successive 25bp cut, taking the benchmark rate to 4.5%. Policy commentary is likely to emphasise on the need for a growth-supportive stance, to help ease financing costs as well as act as a buffer against global developments. Rupiah has been largely rangebound, with any bounce in USDIDR running into stiff intervention risks. The latter combined with debt repayments have led to a moderation in the foreign reserves stock. US Fed is also widely expected to cut two times this quarter. Policy guidance is expected to be dovish, helping to cap market based borrowing costs, including SBN yields.
India is in a holiday-shortened week, ahead of which RBI minutes provided the background to the unanimous on-hold rate decision as well as two dissents to the ‘neutral stance’ at the October rate review. The MPC was in near consensus on the view of entrenched disinflation over last quarter and 3QFY yet preferring to monitor the transmission of policy easing moves and impact of GST rationalisation. View on growth was sanguine. While members pointed to the space to lower rates if required, there was limited conviction on the urgency for such a move. The guidance was moderately dovish, but there were limited signals that a rate cut in December was a done deal. Importantly, a firm set of (2QFY) growth numbers are likely in the run-up to the December meeting, benefiting from a mix of low deflators, early impact of indirect tax buoyancy (effective from late-Sep), and frontloading of exports to the US in the quarter. Inflation meanwhile will slip further to sub-1% in October. Full-year inflation is tracking at close to 2.0% at this juncture, well below the central bank’s forecast at 2.6%. Given this data mix, a resumption in rate cuts will require the central bank to highlight pipeline growth risks from US tariffs and passage of the impact from GST changes, besides pointing to the wide real rate buffer. We see a more than even chance of a rate cut in December. The US Fed has also signaled a dovish tilt, moving from a data-dependent approach towards a risk-management stance (FX note), with lower US rates to provide room for further downside in India’s benchmark rate.
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