RBI Monetary Policy | Just like the Fed, an RBI pivot remains elusive for Dalal Street

Investors these days are obsessed over timing the moment when global central bankers will start to pivot from their current streak of increasing interest rates to worrying over slowing global growth.

In the US, traders are trying to predict everyday when the US Federal Reserve will pause its record breaking interest rate hike cycle amid growing signs that the world’s largest economy may soon tip into a recession.

In India, it is no different, it seems.

Several investors have been hoping that the Reserve Bank of India’s Monetary Policy Committee will possibly set the tone for an eventual pause in rate hikes after a token rate hike of 35 basis points on December 7.

The MPC has delivered on the expectations as far as the quantum of the rate hike is concerned as it raised the repo rate to 6.25 percent from 5.9 percent earlier but the pivot on future rate hikes remained elusive.

To be sure, the MPC has raised the interest rates by 225 basis points since May with some signs that retail inflation, measured by the Consumer Price Index, is moderating. CPI moderated to a three-month low 6.77 percent in October and is expected to fall to 5.9 percent by December, barely within MPC’s tolerance band of 2-6 percent.

In fact, RBI Governor Shaktikanta Das appeared to sound ever more cautious about inflation, especially core inflation, becoming more embedded.

“Core inflation is exhibiting stickiness. The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions,” the governor said in his policy statement.

The statement on the rate-setting panel’s stance was more telling in this regard as the language changed from “further calibrated monetary policy action is warranted to restrain the broadening of price pressures” to “further calibrated monetary policy action is warranted to break the core inflation persistence”.

The governor in his statement appeared to stress the fact that continued geopolitical tensions and adverse global weather conditions that can add uncertainty to the outlook on food inflation, which contributes nearly 46 percent to India’s retail inflation index.

Investors’ reactions to the hawkish tint in the MPC’s statement was telling with the benchmark indices sliding into the red immediately after the conclusion of the governor’s statement and 10-year benchmark government bond yield surging 6 basis points to 7.3 percent.

The Nifty 50 index slid nearly 100 points from the day’s high hit during the early minutes of the RBI governor’s statement to a day’s low of 18,564 points within 20 minutes of the statement’s conclusion.

“Some may be ‘disappointed’ due to the lack of pivot seen in the statement,” Amit Kumar Gupta, founder of Fintrekk, said. He said that the MPC is clearly concerned about slowing economic growth and little evidence of recent interest rate hikes destroying consumption. The RBI lowered its GDP growth rate estimate for 2022-23 to 6.8 percent from 7 percent earlier.

It was pertinent that two members of the MPC voted against the current stance of withdrawing monetary accommodation in the economy given that minutes of the previous meeting had shown both Jayanth Varma and Ashima Goyal raising concerns over slowing GDP growth.

For equity investors, a sense of caution is likely to creep in.

Record high benchmark levels along with pricey, if not rich, valuations rarely agree with a slowing economic growth environment and rising cost of capital. Something has to give, Dalal Street will hope it’s the central bankers and not the green of their screen.

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