RBI Maintains Status Quo (And We Get It Right Again!)

Predicting the future of the market, an exceedingly capricious creature, is a fine art, and at Dalal Street Investment Journal, we have taken this to a high degree of perfection, even if we do say so ourselves. The RBI maintaining a status quo stance on the repo rate tells the tale well enough. In its mid-quarter monetary policy review, everyone on the street was expecting at least a 25 basis points repo rate hike. A smaller group expected as much as a 50 basis points hike owing to the recent inflation numbers.

Despite all these factors, we were of the opinion that the liquidity situation needed some improvement, and that in the face of uncertainty at the global levels, it was necessary to hold the rates for a while. It comes as no surprise to us that the Governor has acted on similar lines.

This is the second time in this year that we have managed to predict the regulator’s moves. Earlier too, when Dr Rajan took over from Dr Subbarao, everyone on the street had expected a rate cut. However, we remained unflinched on our conviction that there was a strong possibility of a repo rate hike, what with the new governor focusing on curbing inflation. Sure enough, our hunch was proved right.

There’s no resting on our glory though, for it is important to keep tabs on what’s next. Let’s try and understand what rationale the RBI has provided for its stance. In its statement, the apex bank indicated that, “The policy decision is a close one. Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty”.

We feel that this is the right step, as along with domestic factors, global developments are equally important for the markets. First and the foremost among these cues has been an expected early QE taper.

We are of the opinion that the chances of an early start to QE tapering are fair. What is equally important, also, is the quantum of the taper. Around USD 15 billion has already been discounted. Anything above this would not be good news for the markets.

So, what can we expect from Dr Rajan in different QE tapering scenarios? On the global front, if QE continues without any changes, we may see some action taken by the RBI in terms of curbing liquidity. If the quantum is higher than USD 15 billion, we foresee that it will maintain the rates at the current level.

As for the domestic factors, we expect inflation to contract in the coming month as vegetable prices drop. However, if inflation remains high, the regulator may consider a rate hike. However, the latter seems a more remote possibility, and till then the markets would remain in Christmas cheer.