Dear Reader,
The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.
Disappointed by the Reserve Bank of India’s (RBI) decision to keep both repo rates and the policy stance unchanged in its February meet, equity markets tanked. Bond yields held firm as expectations of rate cuts seem to be pushed back for now.
The question to ask is this: if nothing changed structurally and fundamentally, why did financial markets react and what did they react to?
While there are many reasons to explain the rise and fall of markets, it is also true that the dependence of financial markets on the central banks’ monetary policy statements, has become an all-encompassing global phenomenon. Indeed, the Global Financial Crisis (GFC) or the Lehman-crisis brought the importance and credibility of central banks to contain systemic faults and failures, into the spotlight.
But the unprecedented economic tumult faced globally during the COVID-19 pandemic only increased the financial markets’ and investors’ fixation on the central bank’s monetary policy.
This interesting FT article (free to read for MC Pro subscribers) points out that in present times, “central bank whispering is a full-time occupation”. It explains that the regularity of committee meetings has also fused with high-frequency trading, news and social media posts. The article quotes Ricardo Reis, a professor at the London School of Economics as follows, “it creates an obsession with monetary policy — even though the small daily moves in rates have a negligible impact on inflation”.
Cut to RBI’s February meet, the expectation or obsession as you may call it, was that while rates may be unchanged, there could be a change of stance from “withdrawal of accommodation” to neutral. Perhaps, that is where the disappointment was for markets. While the Governor painted an optimistic picture on economic growth at 7 per cent and retail inflation heading lower to 4.5 per cent for FY2025, he made no efforts to loosen liquidity that is “tight”.
The flip side of tight liquidity is that the cost of borrowing increases for the economy or stays elevated, writes my colleague Aparna Iyer in this article. Importantly, five out of the six members were in favour of the decision, while only one member --J R Varma -- voted to cut rate by 25 basis points and change the stance to neutral from the current withdrawal of accommodation.
The implications of the recent Monetary Policy Committee (MPC) decision are that short-term rates may continue to remain volatile. This, in turn, raises worries that the cost of borrowing could remain high and stymie private capex that is not vibrant and ready to crowd out lower public sector capex.
That said, there is hope for RBI to start delivering rate cuts from June 2024, says Neha Dave from MCPro Research team. The MPC members have often expressed comfort about a real rate of around 1.5 percent, which is now 2 percent. Further, financial market experts reckon that most central banks including the RBI may wait for cues from the US Federal Reserve that is also still in “hold” mode.
Investing insights from our research team
Britannia Industries: Volume growth top priority as margin peaks
Ashok Leyland Q3 FY24: A fall in RM prices augurs well for the company
EIH: Well positioned to ride the industry upcycle
Syrma SGS: Disappointing Q3, cut in long-term margin guidance
Radico Khaitan Q3 — Riding premiumisation tailwinds
Data Patterns: Continuity in earnings growth to support stock
In case you missed it
MC Pro Election 2024 Portfolio: You can bet on these 14 select stocks to play the election theme
What else are we reading?
Chart of the Day: Are CVs facing a mere blip or a downturn in sales?
Will Modi’s passionate call charge up energy investment?
Small businesses in e-commerce ecosystem can benefit from temp IDs
Investing for tax planning? Avoid the last-minute rush
‘Employers hold the cards now’ as power shifts in US jobs market
(republished from the FT)
Can BJP expand its support base south of the Vindhyas in 2024?
A vote amid hopelessness as everything, including the Army, weakens in Pakistan
Finding UP, Mumbai, Delhi, Jalandhar and Gandhi in a Pakistan election
Is Marxist volte-face to welcome private universities a decade too late for Kerala?
India’s true manufacturing rival is Vietnam, not China
Is India scorning the energy bounty that transformed China?
Personal Finance
There is alpha to be made in private sector banks: Nimesh Chandan, CIO, Bajaj Finserv Mutual Fund
Technical Picks: Biocon, Aditya Birla Capital, Idea and Muthoot Finance (These are published every trading day before markets open and can be read on the app).
Vatsala Kamat
Moneycontrol Pro
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
