Mid Quarter Review of Monetary Policy – Comments

Against Midnightbreak expectations of a 50 bps hike in repo rates, and wide market expectations of a 25 bps hike, RBI refrained from hiking policy rates.

Its policy doc states, other than the mundane global economic performance, that it would seek more data before taking further steps as it would like to see the effects of its earlier hikes. It added that the recent stabilisation of the rupee around 61 – 62 would have disinflationary effects of its own. It mentions that some of the factors causing the most recent spike in consume prices are seasonal, read vegetable inflation in the food inflation category. Midnightbreakfast had highlighted it here http://wp.me/p3FAl7-ee It further states that it wouldnt hesitate in hiking policy rates even in between policy reviews if it found evidence of further upside risks to inflation. Fair enough.  

Guv Rajan had started off with a bang by hiking policy rates by 25 bps in his very first reveiw of monetary policy as Guv of RBI. His comments then as well as those which followed later were fairly hawkish exhibiting his resolve to tame the inflation monster, albeit food inflation primarily, through monetary policy. The thing which was lacking in his predecessor’s conduct of monetary policy according to our opinion, assertiveness and unambiguous inflation targeting, seemed to be getting addressed by Guv Rajan. Markets which were running ahead of his predecessor suddenly were waiting and watching for the present governor’s next move. In this respect, the governor seemed to have been winning at managing expectations of the market participants with respect to his resolve to fight inflation. A 50 bps hike this time would have had a sledge hammer like effect on inflationary expectations. This along with the seasonal nature of some components of the food inflation would have helped in curtailing inflation. Also, by hiking now, the hanging sword of further hikes would have been gone.

By not hiking rates, he now risks the momentum which had built up in his favor to tackle inflation to subside. Any household survey of inflation expectations would show the entrenched nature of the current inflation in India. And inflation expectations are rooted in current inflation rate.

Also, the recent decision of the US Fed to scale back its bond buying by $ 10 billion would again start pressuring our currency. So, rather than being reactive, a proactive approach was required.


Midnightbreakfast stands by its argument of greater hawkishness which was required in monetary policy actions in the recently concluded mid quarter reveiw of monetary policy to slay the inflation monster. 


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