RBI Monetary Policy | What is the message from Shaktikanta Das to markets?

RBI Governor Shaktikanta Das

The message from Reserve Bank of India Governor Shaktikanta Das to markets on Friday is crystal clear -expect more rate hikes over the next few quarters - as the central bank continues its big battle against zooming prices even at the cost of hurting growth for the near term.

There was enough hints, during the governor's address, to show that there isn't any compromise on the war against inflation. A 50-basis-point rate hike won't be the last in this rate hike cycle.

Look at the numbers. By the RBI's own admission, the threat of high inflation is far from over.  Das said the retail inflation is likely to average at 6 percent in the second half of this year and 6.7 percent for the full year, way above the upper tolerance level of 6 percent.

Inflation, measured by the retail prices, increased to 7 percent in August from 6.71 percent in July. If inflation averages above 6 percent in the September quarter, it will mark three straight quarters of failure for the Monetary Policy Committee (MPC) to keep the retail inflation within its 2-6 percent tolerance band. High inflation is hurting the economy hard, impacting their affordability of goods and services, especially the essential food items.

Logically, it will take at least two more quarters before inflation is brought back to below 6 percent levels. This means, it is too soon for the MPC to lower the guard on inflation.

Most economists expected continuation of sharp rate hikes in view of a persistently high inflation also because of the US Fed rate hike impact. The aggressive rate hikes from the Fed has put the emerging markets in a spot.

The RBI is no exception.

And, Das, along with majority of his colleagues at the monetary policy committee (MPC), does realise the danger in lowering the guard on inflation too early.

The big theme of this policy is that inflation is likely to remain central for the MPC 's deliberations in the foreseeable future. Das said the MPC is of the view that persistently high inflation necessitates "a calibrated withdrawal", which means there will be shallow rate hikes ahead. The only question is when and how much.

The fact is, at a time when inflation is a clear danger and the risk of stagflation is a possibility, the MPC doesn’t have too many options on the table except to make money costlier and hope to curb demand.

In the last policy, the governor clearly hinted about future rate hikes to tackle inflation which is what has happened today. Das has walked his talk on inflation fight.

Das doesn't want to leave much for markets to guess or shock markets. Instead, the approach has been managing expectations by gradual, yet upfront communications. That strategy seems to be working fine, evident from markets reactions.

What next? The keyword is ‘calibrated withdrawal’ of easy money policy dependent on incoming data. This, in simple words, means tight stance will remain but through smaller doses of rate hikes. The governor refused to offer a guidance beyond this.

To sum up, the rate hike show isn’t over yet.