• At Mr. Rajan’s first meeting, the RBI raised its repo rate 0.25% to 7.5%, in spite of the weakness of the economy, and dialled back its emergency measures to protect the currency, cutting the marginal standing facility by 0.75% to 9.5% and lowering cash reserve requirements. Mr. Rajan mentioned years of relatively high CPI inflation as a reason for increasing the repo rate. The net effect of these measures may be a short-term monetary loosening. These actions suggest that Mr. Rajan will move the RBI towards explicit inflation targeting (or CPI or WPI — he said that they were both important) using the repo rate as a policy lever. This contrasts with “stealth tightening” measures such as those that were introduced to support INR. Such an approach would be conventional; it seems surprising because it is a change in Indian policy, and because we have all become accustomed to liquidity-trap monetary policy in the West (one commentator noted that there had been no forward guidance — unsurprising, since that is a policy for extraordinary times). 
  • A German poll (unusual this close to an election) has shown a small advantage for the CDU/FDP over the SPD/Greens, but the distance between them is within the margin of error. A grand coalition remains a real possibility if a) the FDP fails to get 5% or more of the vote, b) the (relatively) Eurosceptic AFD does get 5% or more of the vote or c) the SPD does better than the polls suggest. A grand coalition would likely take a softer line on austerity and fiscal transfers to the rest of the Eurozone. The most likely outcome remains a repeat of the CDU/FDP coalition.

Data:

  • UK public sector net borrowing for 2013/14 appears to be running above its fiscal-year-to-date level at this point in 2012/13, excluding temporary effects (transfer of Royal Mail pension plan and BoE asset purchase facility).
  • Existing home sales 5.48m, b.e. Aug, continuing the upward run.
  • Current account deficit stood at its narrowest since the same quarter in 2009. On the quarter, goods exports increased, while goods imports increased only marginally; services exports increased more than services imports; the surplus on income increased; and investment income increased.
  • Initial claims 309k b.e. Up a little from last week’s sharp decline.
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