Have a nice week end.
This week was a kind of Thinkpad week – all about central banks. Two central banks in particular – the US Federal Reserve and the Reserve Bank of India. Both “live by prayer” in some respects, as well as markets.
The RBI and the Monetary Policy Committee have come together amid calls from the market to step up the pace of normalization as inflation risks swirl. Instead, the central bank maintained the status quo and adopted a dovish note.
Do us a favor as we get into the weeds a bit. The market was ready for a rise in the reverse repo rate and it would have made little difference since the effective rate at which funds are absorbed has already risen via the floating rate reverse repo auctions. In fact, at this meeting, the RBI further reduced the role of the fixed rate repo by stating that the 14-day floating rate auctions will be the main liquidity management tool and the window for absorption of fixed rate liquidity will only be available after market hours.
The RBI can argue that this renders the reverse repo rate largely irrelevant. In that case, why not normalize the interest rate corridor and let the reverse repo rate move alongside the main repo rate as it once did?
But, perhaps, such a rise would have changed the discourse on monetary policy. “RBI Raises Interest Rates” would have been a popular headline and maybe the central bank didn’t want it yet. He probably didn’t want to disrupt bond markets any longer, and the accommodative policy helped push down bond yields that had spiked after the budget. The rupiah, however, weakened.
The big question is whether the RBI is underestimating inflation at 4.5% for FY23. The central bank can bank on lower food prices, from items like pulses and vegetables. edible oils, due to supply-side interventions. In addition, it could rely on still weak demand and a drop in world commodity prices. Lower inflation expectations may have supported the central bank’s call, alongside weak industrial production, which could add to fears that the recovery in growth is fragile.
We will know in about six months whether the central bank’s call was right.
In the meantime, we wouldn’t blame you for humming Bon Jovi: ♫ Take my hand, we’ll make it, I swear… Woah… live on a prayer…♫ 🎸
In the United States, inflation rose to 7.5%. There is no ambiguity that the US Federal Reserve will raise rates in March. The debate has moved to the amount of this increase. The likelihood of a 50 basis point hike to start the cycle has increased and there have been rumors of an emergency move. But the Fed may not be in favor of all that yet, writes Bloomberg News. Seven rate hikes are now being discussed over the course of this year.
The rest of the world is waiting to see how the markets will react. There is hope and prayer that it doesn’t go like 2013.
As the Fed and many other central banks move towards tightening, should India fear being seen as an outlier? Could this weigh on foreign inflows and the currency?
There are views that this may not be the case, but prayers are also a big part of those views, we suspect. India is certainly much stronger, macroeconomically speaking, today than in 2013, but for those who say India has decoupled from the world, a reminder of an evergreen quote from YV Reddy – decoupling is contextually convenient but inherently illogical.
Let’s hope central bankers – globally and in India – get it right.
♫WWe have to hold on, ready or not… you live for the fight when that’s all you got…♫🎸
Next week is likely to be spent on Life Insurance Corporation’s IPO as investors peruse its draft prospectus. Is there a way to connect the dots between LIC’s IPO, the quest for lower bond yields and a stable rupee? Raghav Bahl gives us something to chew on with this piece.
Until next week.