Market Walk

RBI Policy – It looks like Feb-22 policy will be more of wait and watch


The week saw more hawkish cues from the US Fed as Powell in his testimony to the Senate hinted at 4 rate hikes instead of just 3 hikes. How will this impact RBI policy with most domestic macros out.

Inflation is still too high

India CPI inflation at 5.59% was sharply higher in Dec-21 compared to Nov-21. This was largely triggered by a spike in food inflation as well as core inflation staying put above the 6% mark for the third month in a row. In addition, WPI inflation at 13.5% also remains almost elevated by past standards. The million-dollar question is whether date flows will really impact the RBI policy stance in the forthcoming February 2022 policy?

IIP is a major worry

While the US has made a big shift to inflation control over growth, it is not yet clear if the RBI would make that kind of a shift. IIP for Nov-21 has come in lower than expected at 1.42%, even with a low base. That shows that the Omicron effect has been quite strong. Remember, we are talking of Nov-21 data and the real impact could only be visible in the Dec-21 data of IIP that will be out only in February, after the RBI policy is announced. RBI may have to strike a very delicate balance between inflation and growth. The likelihood is that February may again be status quo, but will come back to that later. First, a look at how the US rates will pan out.

Four rate hikes in the US likely?

It now looks almost axiomatic that the US Fed would embark on 4 rate hikes in the year 2022 taking the rates to the range of 1.00%-1.25%. In addition, the US Fed has also hinted that once the taper is completed in March this year, it may also immediately embark on a big winding down of its bond book. For now, these are estimates and we still await the actuals. But the US Fed may be just about testing waters to see if the global central banks also follow suit and get hawkish, to assess the risk of likely monetary divergence, if they don’t.

What will RBI do in Feb-22?

It is most likely to be a status quo on rates although it is possible that the RBI may consider a stance shift from the accommodative to the neutral. The RBI would not venture to hike rates in Feb-22 unless there is total clarity that the IIP growth is showing signs of recovery. It must be remembered that the Indian rate cuts were more calibrated compared to the rate cuts in the US at the peak of the pandemic. Also, the US has 1.8% treasury yields with 7% price inflation. Relatively, the gap is still positive in India. The urgency for India to hike rates is not as much as it is for the US since rates are at the lowest level possible. With the Omicron risk and weak IIP numbers, the RBI may hold status quo on repo rates in Feb-22, even if erring on the side of caution.

 

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