Monetary policy announcements by RBI after every 45 days seems to have become a must watch event for all the market participants in all the asset classes.
I will leave the issue of importance of monetary policy for a future article and in this article would express my views on RBI’s announcements on January 25, 2011.
The way equity markets took a beating of about 400 points in 6 trading days from Jan 4 to Jan 11, it seemed that markets have discounted all the future increases in interest rates in that 1 week itself. I heard some of the traders even guessing a 75 bps hike in the instant policy announcement itself.
With inflation not showing any signs of cooling and Government also seemed to have exhausted all the available options for controlling the monster, RBI was seen as the messiah for controlling inflation.
But growth on the other hand was also a concern. Industrial production grew at meager 2.7% rate for November. Also couple of overseas investment bankers were seen reducing their bets on Indian markets due to high inflation and thus higher interest rates.
Thus speculations were ripe about the quantum of raise-25 or 50 or 75 bps hike. RBI however did not surprise markets and kept the rate hike to a moderate 25 bps. Equity markets jumped on the announcement but considering the more than usual hawkish stance of RBI in the policy document started covering up for the gains.
Without taking any numbers, I would expect RBI to increase policy rates again in the mid-term announcement on March 17. Policy rates are still good 250 bps below the peak levels seen last time. Along with this, rising global commodity prices and persistently high food prices inflation has high chances of becoming broad based.
This would keep RBI on its toes as it tries to kill inflation evil created without any of its fault.