Moneycontrol Pro Panorama | Markets resonate RBI Governor Das's optimism

Shaktikanta Das

Dear Reader,

If charged up equity investors were looking for more fuel, they got it from the most reliable pump: the Reserve Bank of India. The central bank’s surprising optimism over growth where it raised its FY24 forecast for GDP growth by a hefty 50 basis points to 7 percent has fired up the Nifty and has given enough fodder to sustain stock market euphoria.

To be sure, the RBI hasn’t turned exuberant on growth today. Its statements over the past 3-4 months have indicated the comfort it derived from GDP growth, to which the second quarter GDP growth data has added conviction. A GDP forecast hike was expected but the unexpected part was the hike all the way to 7 percent and the accompanying robust commentary.  Central bankers are conservative and circumspect on forecasts and like to err on the side of caution. The RBI is no different, until now. Governor Shaktikanta Das’s optimism has been palpable only to be matched by his deputy. In a post policy press meet, deputy governor Michael Patra said that 7 percent could be considered conservative because recent high frequency economic data for October and November suggest growth perhaps getting to above 7 percent. Sure, Patra’s comments alluded to statistical adjustments with the updated GDP data which adds credence to the forecast than a mere judgmental call would.

Even so, this growth comfort only makes the probability of a policy pivot or even a rate cut remote. The optimism is clearly a double-edged sword as our piece here states. Expectations of these are being scaled back among investors now.

Das has matched his growth optimism with an equal hawkishness on inflation. Keeping the repo rate on hold for the fifth consecutive time today, Das reiterated the commitment to bring retail inflation down to 4 percent, on a durable basis. “Moving forward inflation management cannot be on autopilot,” Das told reporters. “MPC will be highly alert on any signs of derailing of ongoing disinflation process.”

The upshot is that the RBI will actively manage inflation, even if the source is from food and fuel which is out of its control. As it continues to tamp down on rogue fires for price stability, it is doing a similar exercise with asset prices for financial stability. Last month, the central bank hiked risk weights in a conclusion of several warnings to lenders that their unsecured lending is getting out of hand. Das said that the banking regulator has a smell test for stress and is always on the look out for pockets of exuberance to extinguish. The RBI cannot wait for the “house to be on fire”.

For the markets, the message is clear. The RBI is far from turning soft on inflation and growth is giving it enough comfort to keep up its war on prices. As Barclays economists wrote in their report, monetary policy is in the Goldilocks zone. For a government headed for electoral polls, this is the best outcome.

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