Emerging-Market Central Bank Preview

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ilan Solot

NEW YORK (BBH FX Strategy) -- The central banks of India, Turkey, Hungary and Thailand meet in the next two days.

We think the greatest chance of a surprise is in Hungary, where the central bank could disappoint near consensus calls for another 50-basis-point hike.

We will also be looking closely at the communication by the Indian central bank for clues of how soon rates will start to fall.

India, Tuesday, 05:30 GMT: We expect the Reserve Bank of India to keep rates on hold in its meeting Tuesday (repo at 8.50%, reverse repo at 7.50% and reserve ratio at 6.00%).

Only a minority of forecasters expect monetary easing. The bank has made a point to communicate that the next move will be a cut, but we don't think it will happen just yet.

The economy is decelerating, and inflation has begun to slow down. The RBI intervention along with regulatory measures by the government and an improvement of global risk appetite has increased foreign investor demand for Indian assets, which led to the strong rebound in the rupee.

Still, we think that sentiment remains fragile and that front-loading rate cuts will only make the RBI's life harder should it have to step in to defend the INR once again. INR has been one of the outperformers in the emerging-market space year to date, but it was one of the worst performers in 2011. We do not think the underlying fundamentals have shifted that much in 2012, so we remain skeptical that INR outperformance can continue.

Turkey, Tuesday, 12:00 GMT: We expect the Central Bank of the Republic of Turkey to keep the repo rate at 5.75%, in line with expectations. The bank will probably continue to micromanage liquidity in the interbank market, which amounts to a de facto tightening.

Since late November, interbank rates have been roughly stable between 11%-12%, from 6%-7% before that.

Inflation and economic activity remain very high, but both are expected to start decelerating in the coming months.

Inflation expectations have come down in recent weeks as the lira strengthened, but it is unlikely to reach the TCMB's 5% target this year.

Positive risk sentiment along with increasing confidence that the central bank will continue providing dollars through daily auctions has reduced the pressure on the lira.

Still, we remain concerned about the country's wide current account deficit, dependency on short-term flows and dwindling foreign-exchange reserves. We do not expect USD/TRY to break below 1.80 and would be looking for opportunities to get long around that level.

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