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In a note to investors, Suyash Choudhry, Head Fixed Income, IDFC Mutual Fund pointed out that IDFC estimates of inflation are higher than what the RBI has put out and the Central Bank seems to be focused on restoring the economy to pre pandemic levels despite weaknesses in supply. "We must admit that maybe for the first time since 2019, the thought occurs that RBI may be missing a trick," Choudhary wrote.

While the RBI estimated consumer price inflation at 5.1% and 5.7% respectively in Q3 and Q4, FY 2021-22, IDFC Mutual Fund put out higher estimates of 5.4-5.5% and 6.2-6.4% for the two quarters respectively. Referring to the RBI forecasts, Choudhary noted that they are “Basis an assumption on degree of unwind in the recent flare-up in food prices. However, the point is that even accounting for some stress testing, assumptions to our CPI trajectory for the next 2 quarters is higher and not lower when compared with our assessment in October (when it was quite similar to RBI’s forecasts)," he said. He further criticised central banks’ impatience to get back to pre pandemic levels on the economy. “Central banks have been focused on a point pre-pandemic that the economy needs to re-attain and then grow beyond. This thought has been apparent in the US Fed’s commentary on labor markets as well as RBI / MPC commentary as described above. However, what matters from a macro-stability context is also the speed of travel to that point. This is especially true as the supply side is nowhere near what it used to be. Thus impatience towards attainment of the pre-pandemic state may be fraught with significant risks," Choudhary wrote. According to Choudhary, the supply side weakness is evident both from CPI inflation and from a widening merchandise trade deficit.

Choudhary added that IDFC Mutual Fund had increased cash levels in its actively managed debt mutual funds even before the RBI policy while noting the low yields on cash equivalents. “All told then, and recognizing that the pain of carry loss is now potentially extended, we still find merit in running conservative," he concluded. The supply of both state and central government debt is likely to increase in Q4 of FY 2021-22, he noted.

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