Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

RBI Says They’ll Wait Before They Hike Rates

The RBI, in it’s mid-term policy review, has not changed rates. The repo rate remains at 7.75%. This is the rate at which banks borrow overnight from the RBI. Let me decode the statement in simple terms.

We Aren’t Raising Rates Right Now, But It Doesn’t Matter Too Much

The repo rate at 7.75% sounds good, but the rate that is now the “operational” rate is the 14 day “bid-for” repo auction. Banks place bids on what rate they can borrow money for 14 days, and the weighted average is taken. Liquidity has eased up, with rates around 8% in general.



Inflation is High But it will Fall

  • Vegetable prices pushed things up, as did double digit housing inflation
  • Veggie prices have only now fallen. So let’s wait and see.
  • There is rural wage growth at a high level, so the pass through will hurt us as well.
  • Monetary tightening (raising of rates) will have a lagged effect to contain inflation
  • Inflation isn’t just supply side; there is a mismatch on the supply and demand, and if supply won’t react, we have to bring demand down.

We’ll take action if Shit Hits The Fan

While inflation is a serious issue, the RBI would like to wait. In this, I don’t disagree, because it looks like the trajectory of interest rates is coming down in the near term.

What they say next is interesting:

There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. The Reserve Bank will be vigilant. Even though the Reserve Bank maintains status quo today, it can help guide market expectations through a clearer description of its policy reaction function: if the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. The Reserve Bank’s policy action on those dates will be appropriately calibrated.

Basically – Don’t expect rate hikes to be on policy dates only. If things worsen, we’ll act in between also. This is excellent work from the RBI!

Overall, the policy has no real impact.The bigger thing is tonight – the big bad Fed move to taper or not to. I think we see a no-action there as well.

    • DJ says:

      Very nice discussion. Thanks for sharing. She might be discounting the other possibility that RBI is just stupid. She pointed out one major issue that I wish every reporter, supply side excuse maker would internalize. RBI is supposed to look at core inflation, ie; minus food inflation and other volatile components and then take action based on their target on that core inflation. So, why is RBI talking about food prices when it is not supposed to be a factor in decision making? I hope someone asks Rajan this obvious question.

  • DJ says:

    Its amusing how they say that rates have a lagged effect and yet they want to wait. Can’t someone remind them that they didn’t take action last year so we are now getting the lagged effect. The argument then was the same – lets wait for inflation to come down. If you are going to wait all the time (for at least 3 years that I have been hearing them say the same thing), then why do we need you. Eff off.

  • D Rama says:

    I am finding this hard to believe that RBI seems to convey it doesn’t understand basics of economics. I mean, if you reduce interest rates, on one hand you allow easy borrowing of money, yet on the other hand, the interest not paid means the other party (lender/saver) gets that much less money as income. Reduced income means reduced spending and consumption in the future. What growth can be expected with a reducing future income?
    More importantly, with inflation running consistently above interest rates, RBI is signalling that there is no point in saving/lending money to lenders/savers. This automatically leads to more consumption today rather than save resources and direct it towards tomorrows growth.
    This is double barrelled suicide, if you ask me, for growth. Kill future investments and kill future demand. This is exactly the opposite of what the nation really needs. Instead, RBI wants India to become completely dependent on foreign investment to run day to day affairs.
    Incredible India!

    • Leo says:

      again wrong if u raise rates it is good coz the black money will be destroyed totally.ther eis so much speculation on land i was amazed each black money moron is rotating 50 crores per day…so RBi should just hunt down this and only legal way to do is rates .
      when u have inflation shooting up…to 40% u destroy the saver …i wll run to gold silver the moment i see 12+ inflation or 8+ core coz then u cant stop the momentum…already it is scary.Rbi wont raise till lungi is around.
      We need a reset of black money which is destroying the country and RBi is i would say toothless crap but atleast it is better than FED OR ECB who have gone mad totally.Atleast RBi is not that crazy but u never know !!!