Moneycontrol Bureau
RBI governor Raghuram Rajan surprised the market yet again by hiking repo rate, reversing market expectation that the central bank will hold rates. In its third quarter review of monetary policy, the Reserve Bank of India hiked repo rate by 25 basis points. It kept CRR unchanged at 4 percent. It raised MSF rate by 25 bps to 9 percent. Rajan said upside risks to central inflation forecast of 8 percent remains and forecasts FY15 growth is in the range of 5-6 percent.
Unpredictable Rajan!
Though a miniscule population did expect a rate hike, it goes without saying that reading RBI's mind on inflation is getting increasingly dificult, feels Samiran Chakraborty, Hd-Research, StanChart Bank. "RBI has cited sticky and higher than anticipated core inflation as the reason for this hike, but all these conditions were prevailing in December also. So, we could have seen a rate hike in December as well, but we did not see it then, we have seen a rate hike in January," he told CNBC-TV18's Latha Venkatesh and Ekta Batra.
Complimenting Rajan's sensible policy guidance, Sajjid Z Chinoy, Chief India Economist, JPMorgan said,"I am happy to have been proved wrong this time. Guidance matters if you take it seriously. The guidance was quite clear that they wanted to see core inflation come down. It adds credibility to the RBI's decision making process."
Way ahead for bonds yields
With the monetary policy uncertainty out of the way, the bond market would now focus on supply and what the government's borrowing program for the next year will be, Neeraj Gambhir, Nomura India said. The government is done with most of the borrowing for this year, for the next two months it will be a supply light situation, which is positive for the market, he added.
According to him, though RBI's forward guidance of monetary policy reads a little dovish, the inflation scenario may not be as rosy as RBI's projections and the market will be concerned about it. "One could see some rally in bond yields over the next two-three weeks, till such time we get into the government borrowing program phase and market starts digesting the information around the next year's borrowing program which is likely to be pretty large even if the fiscal deficit projections are to be met," he said.
Time for a pause?
Gambhir expects inflation to head higher from RBI's forecast and if it does, one should brace for further RBI action. But, as of now, both Gambhir and Chakraborty don't see further rate hikes, but add that move on interest rates would be extremely data dependent going ahead.
Meanwhile, Chinoy said that RBI's guidance said they don't anticipate more monetary tightening in the near term. But, if the economic activity picks up in a few months from now and if the projected trajectory of CPI inflation is not in line with Urjit Patel committee recommendations, then more monetary tightening is on cards later in the year.
"All they have said right now is given the transmission lags they have had three rate hikes in the last four months. Given how weak activity is expected to be in Q1 because of the large fiscal compression that they expect to see some softening in headline and core over the next few months. That is the most we can read out of the policy."
Written for the web by Harsha Jethmalaniharsha.jethmalani@network18online.com
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
