- We expect RBI to refrain from cutting the policy rate
- South Korea’s trade data will provide clues to regional demand.
- Indonesia likely to report benign inflation outturn.
Central bank meetings
Reserve Bank of India (1-Oct): The RBI monetary policy committee (MPC) will mull over a host of developments at October’s rate review. Growth exceeded consensus by nearly 1ppt to rise 7.8% yoy in 1QFY26 on domestic catalysts and we expect 1H average to stay above 7.0%, partly influenced by low deflators. Fiscal policy has picked the baton to support growth via income tax relief, followed by GST rate rationalisation, helped also by RBI’s measures to spur loan growth. Inflation is off lows, but at benign levels, with the indirect tax cuts to impart further disinflationary impulse. The external environment has, meanwhile, turned unfavourable as the US tariff was raised to 50%, besides recent moves to broaden punitive action on service/ invisibles trade. These risks have manifested into a weaker rupee. The FOMC has embarked on its second leg of easing after a long pause. Against the backdrop of firm growth of over 6.5%, fiscal levers being tapped to boost demand, inflation heading up gradually and INR under pressure, we expect the repo rate to be left unchanged this month. There is scope for 20-30bp increase in the official FY26 growth forecast and a downward revision of a similar magnitude to inflation. However, cognizant of fresh tariff salvos from the US and risks to growth, we assign a 30% probability for a cut, if the RBI sees reason in frontloading action. Though are of the view that dovish talk will achieve the desired outcome.
Policy guidance will be important, after bond yields rose sharply following the August meeting, where the neutral stance and lack of clarity on further rate cuts hurt sentiment. We expect the MPC to highlight that they have room and willingness to act, if required, effectively wait till December to gauge impact of tariffs before easing further.
Forthcoming data releases
South Korea: September trade and inflation data are due this week. Exports are expected to show a moderate rebound of around 5% yoy, largely driven by the technical effect from the different timing of the Chuseok festival this and last year. Export momentum faces headwinds following the implementation of reciprocal tariffs in August. Although South Korea and the US have reached an agreement to lower the reciprocal tariff rate to 15%, the deal has yet to be formally signed due to unresolved differences over South Korea’s proposed USD 350 bn investment in the US. Thankfully, demand from ASEAN and other non-US markets remains resilient — particularly in the semiconductor sector, which continues to benefit from rising demand related to data centers and AI infrastructure.
CPI is expected to remain subdued at around 2% yoy. The sharp drop in inflation to 1.7% in August was partly driven by telecom companies’ adjustments to communication service fees. The upcoming Chuseok holiday may temporarily push up food and service prices. With underlying inflation likely to stay near 2%, the Bank of Korea will have room to reduce the base rate by another 25 bps to 2.25% in 4Q.
Hong Kong SAR: Retail sales growth is expected to edge up from 1.8%yoy in July to 1.9% in August, supported by stronger tourist spending amid a weaker HKD. Consumers show improved sentiment, with wholesale, retail, and restaurant diffusion indices all ticked up in August. Mainland visitor arrivals jumped to 141k per day, up 19% YoY during the period, outpacing the 9.9% increase in local resident departures.
Indonesia: Inflation is expected to stay benign at 2.5% yoy from 2.3% month before, around the midpoint of the BI target in September. While food costs were likely up marginally, we expect these pressures to subside as the government unveiled stimulus measures which include rice and cooking oil supplies to vulnerable households. For the central bank, inflation is less of a concern in the near-term as focus shifts to growth stability. We expect 50bp cuts within the next two quarters. On the trade front, the surplus is likely to persist, benefiting from commodity exports that are exempt from the US tariffs, while other segments moderate after a bout of frontloading in 8M25.
Economics Team
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