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The minutes of both the Federal Open Market Committee (FOMC) in the US and the Monetary Policy Committee in India have a common theme -- the persistence of inflation, even after several outsized rate hikes. They have also dashed the fond hopes of some market participants that a pause in rate hikes may be around the corner.
The FOMC minutes spell it out clearly: “Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.” They added that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path. Members were concerned about the very tight labour market and several members wanted a 50-basis point hike.
As for growth, FOMC members minced no words. They said, “A period of below-trend growth in real GDP would be needed to bring aggregate demand into better balance with aggregate supply and thereby reduce inflationary pressures.”
In comparison, the MPC minutes are much more dovish, with two members calling for a pause. They were worried that over-tightening monetary policy could hurt growth. Reflecting this view, MPC member Jayanth Varma said, “In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24.”
Several members, however, pointed out that the only reason retail inflation had come down was because of a fall in vegetable prices and inflation in other items remained above the 6 percent level. As Rajiv Ranjan pointed out, “A deep dive into CPI inflation indicates little evidence of a decisive and durable disinflation process.”
It was left to RBI Deputy Governor Michael Patra to say the stance of monetary policy will need to remain disinflationary till inflation is returned to target. While several of the members said growth in India has been holding up well, Patra made the point that lowering inflation is the best way to achieve sustainable growth and that inflation is hurting consumer demand, investment as well as confidence.
RBI Governor Shaktikanta Das summed it up well: “Disinflation towards the target rate is likely to be protracted, given the stickiness of core inflation at elevated levels.” Note the similarity with the FOMC’s assessment.
Moreover, the last FOMC meeting, for which the minutes are now published, happened before the US non-farm payrolls report saw a huge spike, reflecting very tight labour conditions. If the FOMC minutes were this hawkish before the NFP (Non-farm Payrolls) report, they will be even more so after it. And the markets saw a sell-off after the US Flash Purchasing Managers Index (PMI) for the current month, which showed robust growth momentum and continuing elevated inflation.
In India too, the last MPC meeting happened before the latest retail inflation data, which saw inflation for January spike to 6.5 percent, vindicating the stance of the majority. Most analysts are pencilling in another 25 basis point hike at the next MPC meeting in early April.
The markets have remained remarkably resilient to the rate hikes carried out over the last one year. The S&P 500 is down a mere 5 percent or so, and the Nifty is higher compared to a year ago. Patra has an explanation: “While central banks expect only a stubborn easing, financial markets are betting on a more dramatic downturn as commodity price pressures ease and supply chains improve.”
What’s more, the FOMC staff assessment points out, “The forward price-to-earnings ratio for S&P 500 firms remained above its median value despite the decline in equity prices over the past year.”
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Technical Picks: ICICI Bank, Reliance, Larsen and Toubro, Aurobindo Pharma, USD-INR and Crude oil (These are published every trading day before markets open and can be read on the app).
Manas Chakravarty
Moneycontrol Pro
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