Manish Kumar Choudhary’s Post

The recent move by #RBI to raise the Cash Reserve Ratio (CRR) for banks has caused ripples across the yield curve, pushing yields higher. Moreover, it has stirred discussions about a possible rate hike, given that inflation is soaring approximately 350 basis points above the targeted 4%. Technically, CRR has been increased by 50bps to reduce banking liquidity arising due to withdrawal of 2000 notes. As higher food inflation continues to hold up the Consumer Price Index (CPI), concerns loom about RBI maintaining a hawkish stance. The question arises: 𝑪𝒐𝒖𝒍𝒅 𝑹𝑩𝑰 𝒓𝒆𝒗𝒆𝒓𝒕 𝒕𝒐 𝒂 𝒓𝒂𝒕𝒆 𝒉𝒊𝒌𝒆 𝒔𝒕𝒓𝒂𝒕𝒆𝒈𝒚? Let's delve into a theoretical perspective to gauge the optimal policy rate considering near-term GDP growth and inflation. The Taylor rule offers insights into this calculation: Formula of Taylor rule to calculate policy rate (i), 𝐢 = 𝐑 + 𝐫* + 𝟎.𝟓 (𝐑-𝐑*) + 𝟎.𝟓 (𝐘-𝐘*)   where; R: Rate of inflation R*: Inflation target r*: Natural real rate Y-Y*: Output gap   R: 5.4% (RBI inflation forecast for FY24) R*: 4% R*: 1% (Many economists including current member of MPC Ashima Goyal has highlighted that sustainable real rate for India should be around 1%) Output gap: (-)1% (difference between potential GDP and current GDP, considering long term growth of India has been 7.5% and projected GDP growth for FY24 is 6.5%) Plugging these values into the Taylor rule equation yields a policy rate: Policy Rate = 5.4% + 1.0% + 0.5(5.4%-4.0%)+0.5(-1.0%) = 6.60% (current repo rate is 6.5%)   According to this framework, it appears that there shouldn't be an imminent rate hike by the MPC unless significant shifts occur in inflation and GDP dynamics. There may not be another rate hike but recent high inflation have definitely moved rate cut expectation to H2FY25.

Rates

🏦 RBI Holds Rates at 6.50%...but Inflation remains a concern Unlike the developed countries food and fuel inflation account for more than half the consumer basket in India... And therefore the central bank cannot ignore these. What happened? The Reserve Bank of India (RBI) maintained the 6.5% policy repo rate at 6.50% with a "withdrawal of accommodation" stance. The key takeaways: 1. Inflation Concerns Persist: Despite relatively unchanged real GDP growth and inflation projections, the RBI continues to view high inflation as a significant risk. 2. Core Inflation vs. Food Price Shocks: The RBI's Monetary Policy Committee (MPC) noted that while core inflation is subsiding, the recurring occurrence of significant and overlapping food price shocks could lead to sustained headline inflation.  This implies that even if core inflation (excluding food and fuel) moderates, it may not provide much relief, warranting a hawkish stance. 3. Unique Challenge for India: In India, food and energy account for approximately 53% of the total Consumer Price Index (CPI) basket. This weightage is significantly higher compared to developed economies like the US (around 20%) and the Euro Area (around 22%). Therefore, fluctuations in food and energy prices have a more substantial impact on India's monetary policy decisions, and have to form part of RBI's decision-making. 4. Projections for Food Inflation: The MPC suggests that food inflation pressures may not ease sustainably throughout much of Q3:2023-24, further delaying the likelihood of any rate cuts. 5. Liquidity Management: To manage liquidity in line with their monetary policy stance, the RBI may employ Open Market Operation sales (OMO-sales), involving the sale of government securities in the open market. 6. Impact on Bond Markets: Those anticipating a significant bond rally from the inclusion of Indian government bonds in the J.P. Morgan global bond index might be disappointed. The RBI could mitigate the impact through OMO sales, ensuring liquidity aligns with their policy of withdrawing accommodation. 7. Governor's Firm Stance: Governor's statement underscores the RBI's commitment to its 4% inflation target, emphasizing a hawkish position. 8. Market Reaction: The market responded by pushing yields higher across all government bond yield tenors, with increases ranging from 6 to 11 basis points (bps ie 0.01 percentage point). The 2 to 10-year maturity bonds experienced yields surging to 7-month highs of 7.30% to 7.35%, while the 30-year yield reached its highest level (7.50%) since early November 2022.

The RBI left the repo rate unchanged for the fifth time in a row. Here's how this will impact the Indian economy: #FinanceWrapIndia #LIPostingChallengeIndia #LinkedInNewsIndia RBI Maintains Status Quo: Balancing Growth and Inflation in India. The Reserve Bank of India's (RBI) decision to keep the repo rate unchanged at 6.5% for the fifth consecutive time reflects a delicate balancing act between supporting economic growth and managing inflation. This decision has both positive and negative implications for the Indian economy, which are worth exploring. Positive Impacts: On the positive side, the RBI revised its FY24 growth forecast to 7% based on the strong Q2 GDP print of 7.6%. This indicates sustained economic expansion, creating a favorable environment for businesses and employment. Stable borrowing costs due to the unchanged repo rate can further fuel economic activity by encouraging investment and consumption. Additionally, a positive economic outlook and stable interest rates can boost consumer confidence, leading to increased spending. For borrowers, stable interest rates can make debt repayment more manageable and improve financial stability. Furthermore, India's stable economic environment and growth potential can attract foreign investment, further bolstering the economy. Negative Impacts: However, there are also potential negative impacts to consider. Concerns over rising food prices and global factors pose upside risks to inflation, which could negatively impact consumers and businesses. The potential impact of El Nino on agriculture and rural demand can dampen overall economic activity. Additionally, the delayed transmission of past rate hikes by banks can limit the effectiveness of monetary policy in managing inflation. Stable lending rates may also benefit large corporations and affluent individuals more, potentially widening the gap with lower income groups. Lastly, if inflation continues to rise, the RBI may be forced to raise rates in the future, potentially hindering economic growth. Overall: The RBI's decision to keep the repo rate unchanged is a complex one with both positive and negative implications for the Indian economy. The short-term impacts appear positive, with continued economic growth and stable borrowing costs. However, the long-term implications will depend on how effectively the RBI manages inflation, the impact of global factors, and the resilience of the rural economy. It's crucial to monitor the evolving economic landscape and adapt strategies accordingly to ensure continued economic stability and prosperity in India. #RBI #RepoRate #India #Economy #GDPGrowth #Inflation #Finance #Investment #Business #Loan #InterestRates #BorrowingCosts #EconomicPolicy #MonetaryPolicy #CentralBank #MakeInIndia #DigitalIndia #RBIPolicy #InterestRatesUnchanged #BalancingAct https://lnkd.in/gT4-8fGH

Bholu Tales Getting upset as I changed my view on inflation and US rates, Bholu said: So you turned again? I thought you were in inflation camp. Me: Yea. From mid2021 until fairly recently. No more. Inflation is out of of fire power now. A full force disinflation likely in 2023 & 2024. Thus it’s time to be long US long bonds. Bholu: This fickleness of yours – shifting from bull to bear and then back to bull, more inflation to less inflation, higher rates to lower rates – betrays you as nothing more than a common trader. (He was never interested in reasons. Never.) Me: There is little in our toolkit that allows us to see very far. But we can see short distances. And it will be unwise to not react to the dichotomy between what is priced & what is likely. Bholu: So you ‘basically’ have no secular ideas? Nothing permanent to hold on to? Me: I have some secular views but that’s to be priced only at the edges of the market, in unbridled exuberance and extreme despair. Bholu: Whatever. PS1 I dont work with Bholu now. But the conversation of this sort happened so many times that I am certain to have had this yet again. PS2 Disinflation in the US. And thus a likely Long UST trade will emerge. Not just yet. But soon. Simple rule = US yields peak 1 m before the last rate hike. And how do we know when is the last rate hike. Let’s watch markets. India has a a few more mountains to climb.

📊  𝐑𝐁𝐈 𝐭𝐨 𝐌𝐚𝐢𝐧𝐭𝐚𝐢𝐧 𝐒𝐭𝐚𝐭𝐮𝐬 𝐐𝐮𝐨 𝐨𝐧 𝐑𝐞𝐩𝐨 𝐑𝐚𝐭𝐞 𝐀𝐦𝐢𝐝𝐬𝐭 𝐇𝐢𝐠𝐡 𝐅𝐨𝐨𝐝 𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐑𝐨𝐛𝐮𝐬𝐭 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐆𝐫𝐨𝐰𝐭𝐡📊 RBI’s Monetary Policy Committee (MPC) meeting on June 7, all eyes are on the central bank's policy stance. Here are the key takeaways from the latest developments: 𝐏𝐨𝐥𝐢𝐜𝐲 𝐑𝐚𝐭𝐞𝐬 𝐔𝐧𝐜𝐡𝐚𝐧𝐠𝐞𝐝: For the 16th consecutive month, the Reserve Bank of India (RBI) is expected to keep the policy interest rates steady at 6.50%, according to an ET poll of 14 respondents. This will mark the eighth consecutive policy review with no change in the benchmark repo rate. 𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐕𝐢𝐠𝐢𝐥𝐚𝐧𝐜𝐞: Despite the headline Consumer Price Index (CPI) inflation easing to 4.83% in April, food inflation surged to a four-month high of 8.7%. The recent heatwave and risks of lower crop production due to depleting water levels are significant concerns. 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐆𝐫𝐨𝐰𝐭𝐡: India’s GDP growth exceeded expectations, hitting 7.8% in the January-March quarter, leading to an impressive full-year growth rate of 8.2% for FY24. This robust growth trajectory suggests that the economy does not currently require lower borrowing costs to boost demand. 𝐌𝐨𝐧𝐞𝐭𝐚𝐫𝐲 𝐒𝐭𝐚𝐧𝐜𝐞: The RBI is expected to maintain its stance of withdrawal of accommodation, signaling a cautious approach due to volatile food prices and geopolitical risks affecting oil prices. The policy commentary will likely balance recent inflation stability with the potential impact of extreme weather events. 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭 𝐏𝐫𝐨𝐣𝐞𝐜𝐭𝐢𝐨𝐧𝐬: Goldman Sachs has pushed back its projection for an RBI rate cut to Q4 CY24, anticipating a shallow easing cycle of 50 basis points spread over Q4 CY24 and Q1 CY25. 🔍 𝐖𝐡𝐚𝐭 𝐓𝐡𝐢𝐬 𝐌𝐞𝐚𝐧𝐬 𝐓𝐨 𝐔𝐬: The RBI’s focus on maintaining stability and anchoring inflation expectations indicates a careful approach to monetary policy. Businesses and consumers should prepare for a continued period of steady borrowing costs, with a possible easing of rates only towards the end of 2024. Stay informed and plan accordingly to navigate the evolving economic landscape. 🌐💡 #RBI #MonetaryPolicy #CorporateFinance Source: The Economic Times Stay tuned for more updates Soumya Dey

The Global Yield Story explained 👇   (1) From the central banks perspective, the fight is always about inflation. What happened in the US in the last 2-3 years? - To help the economy post Covid, US kept interest rates lower for a very long time - Lower interest rates lead to inflation  - They thought inflation is transitory(temporary) & hence there is no need to increase rates - Inflation turned out to be sticky & hence US had to increase rates at a fast pace to cope up for the lost ground which troubled the markets (2) What’s happening now? - Rates in the US are at decade highs. These rates were last seen in the 2006 - 08 period (Chart attached below) - US 2 years at 5.0981% - US 10 years at 4.8409% - Rates are expected to stay higher as the GDP is doing well, Payrolls & unemployment numbers are better, Inflation is high. - If inflation is sticky, FED wants the rates to be high & if the economy is doing well, FED does not need to reduce rates - Hence, rates are expected to stay higher, leading to a fall in Equity & Fall in Bonds (Rise in Yields) (3) What’s happening in India? - RBI was very prudent in starting to increase rates early - But infact its been 4 meetings since the RBI last increased rates / its on a pause - Our economy is doing well & inflation is under control & hence we have decoupled from US & our bond markets & equity have not reacted as bad as the US - In yesterdays policy our bond market fell / yields went up after the policy because RBI said it will do Open Market Operations (OMO) - OMO is nothing but selling of bonds. RBI thinks banks have a lot of liquidity but they are not lending to NBFC’s & MFI’s & instead parking it with RBI in the over night market & hence RBI will sell bonds to the banks & take the liquidity from the banks. This lead to the fall in India bonds / rise in yields  - But my personal view is that yields in India should not rise further (unless there is something unforeseen that happens) & hence this is a good time to invest in long duration bonds with a 3 years view. P.S. - I write to simplify investing & finance. You can follow me at Kirtan A Shah

The four critical questions facing the Reserve Bank of India (RBI) in its inflation fight are as follows: 1. Will the RBI Adjust Interest Rates? The RBI has maintained the repo rate at 6.5% for several consecutive meetings. This cautious approach is meant to balance inflation control with economic growth. The RBI expects inflation to gradually decrease but stresses the need for a cautious and actively disinflationary approach to align inflation with the 4% target [[❞]](https://lnkd.in/dqS-cxUm) [[❞]](https://lnkd.in/ddKRYqjz). 2. How Will the RBI Address Rising Food Prices? Surging food prices have significantly impacted headline inflation. For example, in June, retail inflation rose to 4.81%, breaking a previous trend of easing. This rise complicates the RBI's efforts to reduce inflation and diminishes the likelihood of a near-term rate cut [[❞]](https://lnkd.in/ddKRYqjz). 3. What Impact Will Global Economic Conditions Have? The global economic environment, including actions by other central banks and geopolitical tensions, significantly influences the RBI's policy decisions. The RBI must remain cautious about external shocks that could impact domestic inflation and economic growth [[❞]](https://lnkd.in/ddKRYqjz). 4. How to Foster Domestic Economic Activity? The RBI is focused on maintaining the resilience of domestic economic activity, particularly in the services sector. High-frequency indicators suggest ongoing expansion, although there is some moderation. The RBI encourages the private sector to capitalize on growth opportunities in manufacturing and services, contributing to overall economic stability and growth [[❞]](https://lnkd.in/ddKRYqjz). These questions highlight the complexities and challenges the RBI faces in steering monetary policy to ensure inflation remains within target while also supporting sustainable economic growth.

TN Ninan weighs in on Reserve Bank of India (RBI) inflation targeting and monetary policy. He submits that the country is blessed by economic growth and low debt. Moreover, the RBI has a 2% range of targeted inflation. Ninan however cautions that this "elbow room could become an excuse for avoiding necessary decisions." Ninan however pertinently questions whether inflation targeting really works: "The question poses itself: How relevant is a 4 per cent inflation target if it has not been hit since 2019? And what if the occasions when the target does get hit are mere happenstance? In India as much as elsewhere, does inflation targeting really work?" #rbi #policy #inflation #targetting #interestrates #policy #geopolitics #india #ninan   RBI’s inflation conundrum in a rocky world — how relevant is 4% target if it hasn’t been met in 4 yrs Geopolitical conflicts & new cold war have upended oil, various food and commodity markets. Climate-change issues will impose other costs. So, prices will rise even if demand is weak. https://lnkd.in/dzm63RGs