Status quo on all fronts

The RBI did not make hawkish noises at all in the policy. It held repo rates at 4% and the reverse repo rates at 3.35%. Hence, the marginal standing facility or MSF was kept static at 4.25%. Even the stance of the monetary policy was held as accommodative with the central bank promising continued liquidity support to the market. However, this could actually be attributed two reasons viz. the Omicron virus and China’s Evergrande. 

What led to status quo?

The RBI decision to hold status quo on rates and stance had little to do with the inflation worries. Firstly, the Omicron variant has reared its head and the full impact is not yet clear. However, the RBI is not taking any chances and chose to err on the side of caution. It did not want a hawkish stance to coincide with rising virus casualties and lockdowns. The second big factor was Evergrande. The Chinese real estate company has shown little improvement in the last few months and this week it moved closer to a full-fledged default. With $300 billion of outstanding liabilities, Evergrande is not just a systemic risk to China but will rub off on all the emerging markets. 

Inflation is a serious problem

If anyone believes that inflation is on the wane, perish that thought. The US consumer inflation for Nov-21 has come in at 6.8%. That is the highest level in the last 39 years. Much of this inflation is due to supply chain worries and that is not going away in a hurry. The US is taking inflation seriously and the Fed has already hinted at front-ending of the taper and the rate hikes. In this scenario the RBI cannot afford to be sanguine. In fact, the RBI recognizes the potent risk that inflation poses and the risk that rates may have to rise sooner, rather than later. This was just the rehearsal. 

What would be the next steps?

Clearly, the RBI does not intend to maintain a dovish policy for too long. We already have a situation where low bond yields are forcing too many people to take on added risk. The RBI would clearly await a few cues. On the US inflation front, it is clearly a big risk as is evident from the Nov-21 data. The RBI is likely to await data on CPI inflation for November and December as it would give a clear picture of the base effect. But above all, the RBI would be keen to read the fine print of the Fed statement on 15-December. If the Fed insists on front-ending hawkishness, the RBI is also likely to change tack in its Feb-22 policy. That could be the first policy the RBI may actually turn hawkish since the pandemic forced dovishness in 2020!