Predictability back in RBI’s messaging, will come as a relief to markets: Barclays’ Rahul Bajoria

Barclays is calling for 35bps rate hike in August, and 25 bps hike each in October and December. (Photo by Pixabay/Pexels)

With its latest monetary-policy announcement, the Reserve Bank of India has made it clear that there is no need to go beyond market expectations in delivering rate hikes, Barclays MD and chief economist Rahul Bajoria has said.

The RBI on June 8 raised the repo rate by 50 basis points to 4.90 percent, the second hike in as many months, in an effort to curb soaring inflation. The central bank also revised FY23 consumer price index inflation forecast to 6.7 percent from 5.7 percent.

The central bank was giving a clear signal that it won’t take aggressive actions to control inflation, though it kept inflation at the centre of its decision-making, Bajoria said. Edited excerpts from an interview:

The rate hike has been in line with your expectations of 50bps, so what is your opinion on the central bank’s inflation and growth estimates?

On growth, our estimate of around 7 percent is slightly below RBI’s (7.2 percent for FY23) but the inflation estimate (of 6.7 percent for FY23) looks a tad too high to us. So you will need many large supply-side risks for that to be breached.

One of the positives that came from today’s meeting is that predictability is coming back to RBI’s communication. There will be a sense of relief (in the market) that the central bank is no longer taking steps that are significantly more hawkish than what the market is expecting. So, some alignment (in messaging and expectations) seems to be coming back, which will be a relief for markets and the industry. It should result in a more predictable policy environment for the next six months.

Also read: RBI is on way to catching up with reality: Devina Mehra

Do you think the central bank is behind the curve on inflation?

I won’t say the RBI is behind the curve but like the (central bank) governor said, there has been a globalisation of inflation risks. We are operating in an uncertain environment and the nature of shocks perhaps weren’t anticipated.

The RBI has moved decisively over the last couple of months, in terms of its stance (the MPC isn’t committed to a stance now) and interest rates have also shifted materially higher. Therefore, the sense that there was a lot of catching up to do, which was evident in April and May (when they had the unscheduled rate hike) is no longer there.

One could argue that there is further room for interest rates to go higher but I don’t think anybody would say that the RBI has fallen behind dramatically. There will be further rate hikes but not with the same intensity or pace that we saw in the last two to three months.

So, you don’t think there is a need for more aggressive rate action?

The need to sort of aggressively front-load rate hikes is beginning to diminish at the margins. We expect them to continue to raise the repo rate to ensure that financial-stability risks do not creep in and that inflation does not become well entrenched. We are now calling for 35bps rate hike in August, which will take the repo rate to 5.25 percent; then we think there will be another 25bps each in October and December meetings, which brings it to 5.75 percent by end of the year, which is broadly aligned with the inflation trajectory of the RBI.

Predictability of monetary policy is critical when you are thinking as a financial institution. Any bank would want to know how to price risk and you don’t want the risk premium to be very elevated. You don’t want the perception that interest rates could move up dramatically higher. There was perhaps a feeling (in the market) that there may be aggressive rate hikes but today’s policy meeting has indicated that they will move consistently higher (with the rates) but they aren’t going to be aggressive either.

What is the effect of today’s announcement on the stock market?

One of the core messages that the governor emphasised quite a bit and perhaps isn’t as well appreciated is the relative improvements in the banking system in the last two to three years because of steps taken during Covid-19 (lockdown).

That the RBI has not reduced its growth forecast signals the resiliency in the recovery in the domestic activity, which is a positive message. I would still say there are downside risks to growth, given the supply-side risks. But the market will take some comfort from the fact that the RBI isn’t thinking about the growth falling off the cliff or that the RBI isn’t worried about large-scale issues in the financial system.

Also read: RBI retains FY23 GDP growth forecast at 7.2%, sees recovery gathering strength

What is your opinion on the risk of a wage-price spiral?

In general, evidence in academic and market studies, show that we have had some sort of a K-shaped recovery, which has not been conducive to the labour market. Unlike the US or European countries or Australia, you aren’t seeing signs of the labour market being very tight (when employers have to compete for workers). So, naturally, wage-price pressures incrementally are not that binding.

We have not seen any evidence of a wage-price spiral. (But) wages tend to be a lagging indicator around a recovery. Right now there is no evidence of wages increasing materially. Therefore, the RBI could take some comfort that demand-side price pressures aren’t becoming more entrenched, which is typically what monetary policy would try to address over the medium term.

Also read: There is a chance of healthy growth is inflation is kept under check: Sanjiv Bajaj

How do you see the rake hike affecting capex spend?

Capex will be a function of two things. One is capacity utilisation, which has clearly been improving across manufacturing and service industries, with a more durable reopening and Covid starting to appear in the rear-view mirror.

The second is the cost of capital, which typically has a lagged impact. You will still have a decent capex recovery, given that there is increased activity in the economy but the fiscal and monetary steps taken to address inflation may dampen the recovery. Say, if you were expecting a 10 percent capex growth, you may see a 7 percent.