Vijay Kumar Gaba

 The Monetary Policy Committee (MPC) is currently holding its bi-monthly meeting. This particular MPC meeting is perhaps one of the least discussed by the market participants. There is not much anticipation about the outcome that will be known tomorrow morning. The consensus overwhelmingly believes that RBI will maintain the status quo on rates and monetary policy stance.

A quick reference to a note prepared by the research team of the State Bank of India would be apt to highlight the extent of the lack of excitement amongst market participants over this MPC meet. The SBI team devoted three full pages to verify a humorous US study that correlates the height of Fed chairman to the rate hikes and discovered that incidentally it is true in the case of India also.

Though the market is divided in its expectation about the course of action the Federal Open Market Committee (FOMC) of the Federal Reserve of the US would take in their meeting scheduled on 13-14 June 2023; few expect a 25bps hike by the Fed would have any bearing on the RBI decision making. To that extent RBI policy making effort may have already diverged from the developed market central bankers, particularly the US Federal Reserve.

The reasons for this divergence in the direction of monetary policy are obvious – strong growth data; inflation within tolerance range; stable bonds and currency markets; comfortable liquidity; positive foreign flows; much improved current account; and better than expected corporate performance. Specter of an erratic monsoon is definitely a red flag; but it may influence the timing to begin easing the monetary policy rather than the decision to maintain the status quo. 

I find it interesting to note that economists are not bothered to mention the probability of the MPC to consider accelerated tightening due to heating of economy, especially given the GDP growth has outpaced RBI’s own much above consensus forecast; spike in unsecured personal loans; and sharp rise in real estate prices in most urban and semi urban pockets.

Like market participants, I am not eagerly waiting to hear what the governor Das has to say on the MPC decision tomorrow morning. Nonetheless, I would be keenly watching if the RBI takes some precautionary steps to check unsecured personal loans and credit to the real estate market. I am also not keen to look for a hint of rate cut in the August meeting, though the real rates are now in the territory where these could constrict growth.