Bold or risky: Experts' take on RBI policy

The RBI in its policy statement said that inflation had increased mainly due to food prices and even as the high headline number leaves no room for complacency, there was merit in waiting for data after recent indications that food inflation could turn down.

The central bank had to take a nuanced view in the wake of high inflation that has remained consistently in the “uncomfortable” zone despite nearly 15 rate hikes in four years and in the face of record lows in economic growth resulting from the interest-rate policy.

Also read: 5 reasons why RBI chose to keep rates unchanged

Economists and markets were widely expecting a 25 basis points hike in the repo rate.

Experts’ reaction

“The governor did not go by the strict book-ish response,” Arundhati Bhattacharya, Chairman of the country’s largest lender State Bank of India, said. “Kudos to that.”

Vegetable and food prices in the mandi had come off in the last week of November and by mid December, so it was right for the central bank to think December inflation should head lower, she added.

The bank, which has been sitting on large deposits, however, would be in no rush to cut deposit rates for average savers. “It will hurt the depositors if we cut deposit rates on the retail side.”

“It’s a balancing act,” C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Committee and a former RBI governor himself, said, adding that he was also expecting food prices to turn lower in December.

But he pointed out that the RBI governor had also indicated that the central bank will have to tighten policy if food prices do not cool in the near future.

Also read: Expect food inflation to ease going ahead: Rangarajan

“The recent spike in food prices did appear transitory in nature,” Abheek Barua, Chief Economist, HDFC Bank. “It was a nuanced reaction by the RBI to not read much into one reading and make it the basis of a rate hike.”

But not everyone in the market was as impressed. “We’ve had double-digit inflation for about all of four years now. This is a central bank in denial,” said Jahangir Aziz, Chief Economist, JP Morgan India said. He added that the central bank was risking getting into a position where it is compelled to take action too late.

Also read: RBI in denial; will play catch-up to inflation: JPMorgan

Market view

Nirmal Jain, Chairman of brokerage firm IIFL, was more outspoken in support of the move and went so far as saying there was no connection between monetary policy and vegetable prices.

“So, you have been giving a medicine, which is not appropriate for the disease you have. You draw the graph of the recent interest rate hikes and inflation and you will see there has been no correlation,” he said. “As a result, it only had the side effects that we have seen [by way of low growth].”

“Also, when you increase the policy rate, banks that are already saddled with huge non-performing assets, the burden on them also goes up and the sentiment becomes further negative”

“The market was clearly expecting a 25 basis point hike. This [move] will cheer both the bond and equity markets,” Ananth Narayan of Standard Chartered Bank, said.

Shorter-maturity fixed-income instruments would get a boost as markets were expecting a rate hike, Narayan said. Prices of longer-term instruments, however, would also likely rise but may not be able to sustain the rally, added.

To watch Naina Lal Kidwai, President, FICCI comments watch video