Does data really warrant a status quo?
Let’s look at CPI to start with. CPI numbers for both May and June have been above the 6 per cent mark – the upper range of RBI’s inflation band. To this, RBI has maintained that inflation is showing signs of stickiness, but it is only a “transitory hump” that should moderate in the third quarter.
So, maybe we could see some upward revision in the CPI data in the upcoming policy. However, as we can see the world over, central bankers are seemingly more tolerant of inflation given the larger growth prerogative.
Crude oil prices too have risen from $72 a barrel to the current $75. As long as oil prices remain within a narrow range, it should not be ominous to policy decision making. The USD/INR which was at ~73 during the June policy, now stands at ~74, which is not a material move anyways.
We are at an all-time high forex reserves, which also tends to be supportive if there were to be a rout on emerging market currencies. The threat of a potential third wave of Covid-19 remains live, though pace of vaccination has enhanced and recovery rates also have shown improvement. Monsoons are on track and better clarity would there by September end.
Amid this backdrop, it is only pragmatic that status quo prevails and RBI may not really be in rush to hit the accelerator pedal on key rates. Liquidity in the banking system is more than adequate and maybe we could expect some timelines for normalisation of the same.
The market seems to be already anticipating some increase in variable rate reverse repo (VRRR) – both amount and tenor. Given that RBI had already revised downward India’s growth forecast, we do not expect any further reductions for now. Bond yields in our view are already factoring in an eventual rate hike and the steepness reflects that sentiment. The 10-year US treasury is trading at around 1.25 per cent levels while Indian 10-year bond is quoting at ~6.20 per cent – a spread of ~5 per cent. The spread was under 4.5 per cent at the start of FY 2022.
All in all, the MPC may continue its extended pause stance yet another time and prefer to get more clarity on the pandemic as also the macro front before hitting the rate hike button.
(Lakshmi Iyer is CIO – Debt & Head – Products ar Kotak Mahindra AMC. Views are her own)
