Monetary policy: RBI will need to cut through its own noise
What the market needs is a consistent tone that indicates RBI’s judgement on inflation and growth. What the markets needs most is forecasts that are not written on sand
Central banks are supposed to be the beacon of sanity when markets and even economic data are volatile and confusing. This can’t be said about the last two policy statements from the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC).
For starters, RBI has published one too many forecasts for inflation. Unlike in the past when it used to issue an annual forecast for inflation that came up for frequent review, the central bank now has a quarterly forecast, an annual forecast and even an average inflation rate it sees in the first and the second half of a fiscal year. This is in addition to the formal inflation target of 4%.
To befuddle an already confused market, MPC’s resolution statements in February as well as April and the minutes of the meetings that had comments of all members, appeared disjointed.
For instance, in the policy statement of April, the central bank slashed its inflation forecast (several of them) and supported it with a rather dovish tone. Markets that day rejoiced and bond yields dropped sharply. Of course, the statement flagged all possible upside risks to inflation but the forecast glaringly showed an expectation of softer inflation. The inflation forecasts show that RBI’s metrics are different from what its judgement on inflation is.
The minutes released after a fortnight revealed a very hawkish tone and the highlight was RBI deputy governor Viral Acharya’s clear indication that in all probability, his next vote would be for a rate hike. Markets reacted accordingly, with bond yields rising sharply.
It shouldn’t be a surprise that analysts are divided on what MPC will do on Wednesday. Various polls across media reveal that there are a large number of analysts who expect a status quo, but there is also a sizeable bunch expecting an RBI rate hike.
The six-member MPC has a tall task this week and it is not the usual war with inflationary expectations. The committee’s task is to cut through the noise it has created in the past two policy sittings through the resolution statement and through the minutes that followed.
Whether RBI holds key policy rates or hikes them is immaterial since the price of money has already gone up through lending rate hikes and even bond yields. What the market needs is a consistent tone that indicates RBI’s judgement on inflation and growth. What the markets needs most is forecasts that are not written on sand.