Moneycontrol Pro Panorama | Will the MPC signal a pause? 

The Reserve Bank of India (Photographer: Dhiraj Singh/Bloomberg)

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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. 

All eyes are on the Monetary Policy Committee meeting this week and the announcement on the policy rate on Wednesday. Markets across the world have heaved a sigh of relief as inflation has come down. The Bank of Canada has been the first among major central banks to announce a pause in rate hikes, saying it would prefer to wait and watch the impact monetary tightening has had on the economy. Other central bankers, including Fed chair Jerome Powell, have started to make dovish noises. The upshot: bond yields have fallen and stock markets have rebounded in global markets on hopes of an imminent end to the tightening cycle.

Of course, indications that the US labour market continues to be very strong, with unemployment at its lowest in half a century, have unnerved markets a bit, as they worry that the Fed may then be forced to raise rates further. A week ago, the Fed Funds futures expected the policy rate to plateau at 4.75-5 percent; now, the probabilities are skewed towards the policy rate topping off at a higher 5-5.25 percent.

But that’s in the US, where demand-pull inflation is what matters. In India, consumer price inflation is now within the RBI’s target range. Retail inflation for the third quarter of 2022-23 has come in at 6.1 percent, well below RBI’s estimate of 6.6 percent. The inflation data for December and the Index of Industrial Production numbers for November show that lower food inflation has supported consumption growth. Supply chain bottlenecks have eased considerably, with the re-opening of the Chinese economy. The Bloomberg Commodity Price index is lower than a year ago. The same holds true for crude oil prices. The Union Budget’s nod towards fiscal consolidation has helped, keeping bond yields subdued.

Nevertheless, core inflation has remained sticky. The Economic Survey stated: “A lot depends on industrial input prices: they may ease, but on the flip side their delayed pass-through to consumer prices may contribute to the stickiness of core inflation.” That is why the MPC may raise rates by another 25 basis points (bps) on Wednesday.

In any case, a 25 bps hike has already been factored in by the markets. They key question is: Could the MPC emulate the Bank of Canada and signal a pause in rate hikes?

We have two articles on the MPC meet today. One of them takes a contrarian view and argues that, with inflation coming down, it’s time for the RBI to support consumption by not hiking interest rates further. It says, “Just as the textbooks say that the Fed should raise interest rates to do right for the US economy, by the same token RBI should not as the retail inflation rate at 5.7 per cent has returned to within the tolerance limit of 6 per cent and there is an acute need to keep pumping the economic engine and create more jobs.” All that needs to be done, says the piece, is for the government to keep a watchful eye on food prices.

The other article by my colleague Aparna Iyer says that while monetary tightening by the MPC is now almost at a peak, there are two other concerns affecting markets. One of them is the tightening of dollar supply, which will affect all emerging markets. The other is specific to the Indian market and relates to the allegations levelled by a short-seller against the Adani group, which will weigh on markets unless the air is cleared soon.

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Technical Picks: Turmeric, USD-INR, Hero MotoCorp, PEL, EPL and Bank of Baroda (These are published every trading day before markets open and can be read on the app).

Moneycontrol ProManas Chakravarty