Monetary Policy

Analysts must forget about rate cuts for now


The monetary policy announced on 06th December was largely along expected lines. The Monetary Policy Committee (MPC) opted to maintain status quo on the rates front. But the real takeaways from the policy were outside the rates front. For example, the RBI maintained its GVA projection for the full year at 6.7%, which does look a tad optimistic. However, the RBI also upped inflation guidance for the full year by 10 basis points to the range of 4.3%-4.7%. So where does that leave the rates scenario going ahead?

Inflation could hold the key

As the CPI inflation data has shown time and again, the retail inflation has been on an upward trajectory over the last 4 months. While the weak Kharif output was partially responsible for the spike in food inflation, the CPI inflation also bore the brunt of higher metal prices and higher crude oil prices. Both these factors contributed heavily to the rise in secondary inflation. With global oil prices likely to remain buoyant till the completion of the Saudi Aramco IPO, the Indian economy needs to brace itself for above 4% inflation in the months to come. With the inflation sustaining above the RBI comfort zone of 4% the RBI is unlikely to oblige with any rate cuts for now. Also, fiscal deficit is already threatening to spiral. The RBI would not want to cut rates and give a thrust to the consumption binge. From that standpoint, rate cuts are tough!

Domestic & global growth

This is the area that is likely to see a distinct change in terms of the central bank approach to interest rates. The US Fed is already looking set to hike the Fed rates by 25 bps in December. The likes of Goldman have warned that the Fed could hike rates up to 4 times next year under Jerome Powell. The US is not alone in this bullish outlook. EU GDP is growing at the fastest clip in the last decade and Japan’s GDP growth in the September quarter has come in at 2.5%. These are the kind of growth numbers that will spur these central banks to give up on their easy liquidity approach. While rate hikes may take some time to come in Japan and EU, the era of rate cuts is certainly over. Globally, central banks may move towards a dearer monetary policy!

What it means for rates?

To cut a long story short, Indian bond markets need to forget about further rate cuts for now. The sharp spike in bond yields was actually indicative of this sudden shift in monetary approach. While inflation will be a key concern, India will not want its monetary policy to diverge from the rest of the world. That could have negative consequences for the flow of equity and debt flows into India. It now looks like the 200 bps cut since Jan 2015 may be the end of the road for rate cuts. It may mark the end of easy money policies! ©

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