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It is Friday and we are at the end of this week’s game of rate cut bets across the world. This week is special because central bankers were participants in this game. Both the US Federal Reserve and the Reserve Bank of India released the minutes of their latest policy meet. The minutes gave a peak into what members thought and perhaps what a bingo game would look like if they played.
Markets were more than happy to place their bets on who would blink first, or whether the triple stare contest between markets, the Fed and the RBI would ever end.
While equity markets invariably make us picture a Vegas-style casino arcade, there is a tamer play to figure out the puzzle that is the timing of rate cuts. A game of bingo should do us good here. The classic bingo consists of numbers randomly arranged in 25 square tiles and as the host calls out numbers, the participants can strike them out on their card. A strike through a row, vertically, horizontally, or diagonally, is a win.
Here’s our simple rate cut bingo version, with nine tiles.
If the RBI’s committee minutes are parsed, it is obvious that members differ in their assessment of the economy. Ashima Goyal believes that more supply side measures are needed although she isn’t overly perturbed by food inflation. Global oil prices have not surged despite persistent geopolitical hostilities which shows that price pressure from imports won’t upset the policy balance significantly in the coming months. Goyal has pointed out that the RBI’s 4.5 percent inflation forecast for FY25 offers scope for rate cuts. While she voted for keeping policy rates and the stance unchanged, analysts at Nomura believe that a dissent can be expected from Goyal soon. Goyal might win the rate cut bingo, but not yet.
The first dissenter on rates was Jayanth Varma as he voted to cut policy rates by 25 basis points at the February meet. Varma’s argument is that a real policy rate of 2 percent is overkill and unnecessary to bring inflation down to the 4 percent target. He further argues that the government’s fiscal consolidation move would give the RBI the room to ease. Also, the output gap is negative, according to him, which warrants rate cuts. In our bingo, Varma has already walked off with the prize.
The RBI trio of Governor Shaktikanta Das, deputy governor Michael Patra and executive director Rajiv Ranjan are all worried about food price uncertainties and believe the central bank should not let its guard down on inflation yet. “The outlook for the Indian economy remains highly sensitive to inflation risks. High inflation erodes purchasing power, especially for those least protected against the higher costs of essentials like food….. It is only when inflation subsides and stays close to the target lastingly that policy restraint can be eased,” said Patra, summing up the thinking behind the RBI’s stance. Das corroborates his deputy’s rationale and in fact somewhat calls out the market’s expectations on rate cuts. “We must remain committed to successfully navigating the ‘last mile’ of disinflation which can be sticky. As markets are front-running central banks in anticipation of policy pivots, any premature move may undermine the success achieved so far,” said Das according to the minutes.
The RBI executive team are still unsure all the tiles line up for winning their bingo prize, which is the 4 percent inflation target.
What about markets? Analysts at half a dozen brokerages including Nomura, and Goldman Sachs expect rate cuts in six months. Those at HSBC believe that the first cut could come as early as June. Easing core inflation, fiscal prudence and supply side assurances, as well as prospects of benign global commodity prices have strengthened the rate cut expectations. Also, the Fed’s move to ease policy would add more urgency to cut rates here.
Calling out easing core inflation, comfort on oil prices, and fiscal prudence is easy. We can throw in the Fed’s move and US-India rate differential compulsions, and supply side assurances too. But uncertainty on food inflation persists, there is growing disagreement on K-shaped growth and monsoon is a wild card. Winning this rate cut bingo isn’t easy, though the markets are closer to a win.
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