RBI policy: Tone’s hawkish, and there’s nothing ‘inadvertent’ about it

MUMBAI: Central bankers hardly provide opportunities to celebrate. Even when they occasionally do, they are quick to come up with caveats that cause the euphoria to be rather short-lived.

Reserve Bank of India (RBI) Governor Shaktikanta Das did so on Friday. In just about two hours after what appeared to be a declaration of victory over inflation after nearly 20 months of tense battle, Das damped it.

“We do not communicate anything inadvertently, let me make it very clear,” Governor Das told reporters during the customary interaction after the latest policy review that was earlier interpreted as setting the stage for an easing of monetary policy. “If somebody is assuming it’s a signal to move toward a neutral stance, I think it will be incorrect.”

After five straight meetings of pause on interest rates and relatively well-behaved financial markets, it was a perfect setting to conclude that it may be time to shift.

In the absence of tough messages such as bond sales or a higher cash reserve requirement as in the past, bond investors joined global peers in anticipating a shift in gears.

“Look at the inflation trajectory, we are still away from the 4% target,” said Das, referring to forecasts of above 5%.Does the market have a reason to believe that the Governor is too cautious?Inflation: It landed as an unanticipated hurricane in 2022 forcing central banks across the world to raise interest rates in ways not seen in more than three decades. That monetary policy is successful is reflected in the easing of core inflation, said Das. Food inflation is seasonal and there are enough tools to handle it and it could be seen through.

Global Factors: Soaring US and UK bond yields during the year was the biggest worry for every central banker threatening bankruptcies for many financial firms. But that has since abated with the benchmark US treasuries at 4.17%, after nearing 5%. Federal Reserve Chairman Jerome Powell has paused on easing price pressures but is hesitant to take the foot off the brakes.

Crude Oil: Heavy imports of crude oil have always been a ‘Sword of Damocles’ over the Indian economy. Supply cuts and geopolitical tensions threatened to push up the prices. But the gloomy global economic outlook, as the Chinese economy falters, has brought down the price of crude to $76 a barrel, from a high of $96. This is against the base case assumption of $85 a barrel.

“The RBI MPC stopped rate increases quite early so the Governor is cautious about declaring victory over inflation. Hence, he doesn’t want to provide forward guidance,” said A Prasanna, head of research at ICICI Securities Primary Dealership. “He’s making sure that the market doesn’t run ahead of itself. Otherwise, the RBI is running out of reasons to remain hawkish.”

Historically, the gap between the end of a rate hike cycle and the start of a rate cut cycle has been about 11 months, says Deutsche Bank. By that measure, the easing cycle may have to begin in January.

To expect that may be absurd. But the MPC is probably running out of reasons to keep voting for a pause and focus on the withdrawal of accommodation.

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