RBI Policy Preview: Team Das set to follow Powell to raise rates again

The last few weeks have witnessed fast-moving global developments. Recent data flow suggests a global recession in 2022 appears unlikely. But just when you think there is light at the end of the tunnel, the tunnel only seems to get longer!

US CPI inflation seems much more sticky than what the policy makers anticipated – leading to a flip flop for markets trying to anticipate what next September month alone is testimony to this effect.

The probability of 75 basis points (0.75%) rate hike by the US Fed has been oscillating worse than weather fluctuations! From a less than 50 per cent probability to almost a slam dunk – all this has led to heightened volatility in bond yields.

UST 10 year is almost at 3.70 per cent levels and is not suggesting a breather anytime soon. Even the US policymakers seem to be in no rush to put a break on the rate hike accelerator yet. The guidance suggests more rate hikes in the months ahead.

What about India? How will our policymakers act when they meet to decide on key policy rates? Is India truly decoupled from the rest of the world not necessitating aggressive rate action? These are some of the most discussed thoughts in the market place as the event date draws close.

RBI has delivered an effective 205 bps rate hike till now within a very short period of time, while the Fed has delivered 300 bps rate hike till now. With an expected 50 bps rate hike in India in the upcoming policy, we are quite matching the pace with the US so far. From now on, it is quite likely that the pace of rate hike in India could slow down, with a take it as it (data) comes approach given increasing global growth headwinds.

We also have viewed some risks to the growth forecasts, and could see some downward revision in the upcoming policy. Aiding the sentiment, however, is that Brent crude oil prices have edged lower to ~ $90/barrel – a key import item for India. Food prices have remained a tad sticky, but it doesn’t look ominous yet.

Headline CPI may still be pretty close to the RBI forecast, so we do not expect any material tweaks in inflation guidance.

However much one gazes at the crystal ball, one has to bear in mind the effervescent nature of the markets. While we are of the view that the 6 per cent repo rate region could be a pause area for policymakers, the ever-changing global landscape, the massive USD strength, commodity price fluctuations, geo politics etc have led to the OIS curve (interest rate swap) in India to discount more aggressive rate hikes from here on.

Also equally of concern is the fact that we are against the tide as far as currency is concerned (as the dollar strengthens) and the resultant dip in our foreign exchange reserves is concerning.

To quote Jensen Ackles,” I used to be scared of uncertainty, but now I get a high out of it.”

(Disclaimer: Views are personal and do not reflect the views of Kotak Mahindra Asset Management Company Limited.)