The unscheduled meeting of the Monetary Policy Committee (MPC) in early May and its decision to raise the repo rate by 40 basis points (bps) uprooted the telegraph poles the Reserve Bank of India (RBI) had planted to help guide market expectations.
"…as and when we decide on something we will spell it out, we will give guidance, and will be calibrated. We don't like suddenness and sudden surprises," Governor Shaktikanta Das had said in February.
Of course, since then, the repo rate has been raised on two more occasions, the 50-bps rate hike announced on August 5 taking the policy rate to 5.4 percent. Now, clues about future policy action from the central bank are all but non-existent.
"With regard to future policy, frankly it will not be possible to provide a future guidance," Governor Das said today.
"We are now in a cycle of rate hikes and given the level of uncertainty, I would not venture to provide a future guidance about the rate actions," Das added.
This is not the first time in recent weeks that Das has been reluctant to provide any sort of guidance on monetary policy. On July 22, the Governor had summarily rejected a proposal from fellow MPC member, Jayanth Varma, that the committee's members could start moving towards providing projections of the future path of the policy rate akin to the US Federal Reserve's dot-plot.
According to Das, a forecast of the future path of interest rates could create "unnecessary expectations" at a time when the situation was already extremely volatile and uncertain.
Fair enough. But markets will try to get ahead of the RBI and guess what the central bank's actions are going to be.
More hikes or pause?
In the post-policy press briefing on August 5, Das said he could not say at what level of inflation the MPC would stop hiking interest rates as the situation is very uncertain.
"Market's disappointment today is the complete lack of guidance," noted Suyash Choudhary, head of fixed income at IDFC Asset Management.
"But so long as the progression of global macro data remains consistent with what we are witnessing today, one shouldn't need too much of guidance to begin forming a more benign view on where this cycle peaks out," he added.
A repo rate of around 6 percent has long been identified as the level at which the committee might become data dependent. This leaves the possibility of another 60 bps or so worth of rate hikes in the coming months.
The MPC is scheduled to next meet on September 28-30. Until then, all that people have — apart from new data — is what Das said today: "Guidance is essentially withdrawal of accommodation — that we are withdrawing accommodation and we want to control inflation. From that you have to draw up your own derivatives."
As instructed by Das, economists are drawing up their own conclusions.
According to Aurodeep Nandi, Nomura's India Economist, the implicit message from the RBI retaining its policy stance of withdrawal of accommodation is that "rates are yet to reach neutral territory, and that more rate hikes are warranted".
Others are more optimistic.
"There was no change in the stance or any relief in the Governor's statement, indicating a possible pause in the next policy," noted Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services.
Stance-liquidity link
The MPC's policy stance is supposed to dictate the state of liquidity conditions in the banking system. As such, when the MPC decides to change its stance, the RBI must alter the liquidity conditions appropriately.
Which is why the committee found a middle ground between an accommodative stance and neutral by coining the phrase 'withdrawal of accommodation', indicating that the stance of the policy was not accommodative anymore — how could it be when the RBI is likely to fail in meeting its inflation mandate — but also not forcing the central bank to tighten liquidity conditions as much as it would have to under a neutral stance.
This stance — although the MPC itself does not use the word 'stance' to describe it as such — remaining unchanged at 'withdrawal of accommodation' is the RBI "signalling yet again that the notion of stance is being defined by the liquidity in the system, and in turn, the level of the overnight rate instead of the repo rate hikes," said economists from HDFC Bank.
"To recall, the central bank had earlier defined accommodative policy as one where the weighted average call rate (WACR) was below the repo rate and a 'tightening' stance where the WACR moved above the repo. Clearly, a change in stance to neutral or calibrated tightening would imply a significant reduction in liquidity conditions so as to take the WACR higher and could be disruptive to the nascent growth recovery underway at this stage," they added.
Clearly, it is the tail (liquidity conditions) wagging the dog (policy stance) here.
In response to a question in the media briefing, Governor Das today said the normalisation of liquidity will spill over into the next financial year given that certain pandemic-era emergency measures such as targeted and special long-term repo operations will only mature next year.
As per RBI data, long-term repo operations worth Rs 66,131 crore will mature in FY24.
So, while liquidity conditions may determine what the stance of monetary policy is, predicting where interest rates may go is fraught with far more risk.
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