Credit Policy charts its own path

In a way, the status quo on rates was not a big surprise in a situation when the GDP growth is struggling to revive. The RBI is right in saying that private consumption is still tepid and needs the support of an accommodative stance. In fact, if one looks at the latest IIP and core sector data, high frequency points are showing the lag effect of Omicron. So, some amount of monetary support is mandatory at this juncture; meaning low rates and ample system liquidity. There is one more argument in favor of adopting a stance that is divergent. For instance, the US rates are 0.00%-0.25% at a time when the inflation is 7.5%. In contrast, in India repo rates are just at 4% at a time when the inflation is 5.5% so the moral of the story is clear. The risk of negative real rates is much greater in the West as compared to what it is in India. The RBI has also made an interesting affirmation that in a choice between reining in inflation and boosting growth, it will be partial to the latter objective. After all, India cannot afford weak growth, although higher inflation can still be managed by RBI. 

Volatility can’t be wished away

Rates and liquidity are just one part of the story. The third aspect for the RBI to worry about is the central borrowing program. Budget 2023 has raised the borrowing target by 25% to Rs.14.95 trillion. That means, India will be in a sort of quandary. It will not be able to afford higher rates and yet will have to pave the way for higher rates if global monetary policy becomes hawkish. FPI flows are still a big driver for India and if the rate divergence is too high, India risks outflows from debt and equity, apart from rupee weakness. In short, the current situation of monetary flux means that Indian financial markets could be exposed to bouts of volatility. Rates and liquidity are just one part of the story. The third aspect for the RBI to worry about is the central borrowing program. Budget 2023 has raised the borrowing target by 25% to Rs.14.95 trillion. That means, India will be in a sort of quandary. It will not be able to afford higher rates and yet will have to pave the way for higher rates if global monetary policy becomes hawkish. FPI flows are still a big driver for India and if the rate divergence is too high, India risks outflows from debt and equity, apart from rupee weakness. In short, the current situation of monetary flux means that Indian financial markets could be exposed to bouts of volatility. 

Prepare the markets

For now, it looks like the RBI has chosen to wait for the data. There is inflation and growth numbers expected. Then, the all-important Fed meet is scheduled in March, where the first rate decision is likely to happen. The quantum of first hike and the language of the Fed will be the key. What cannot be denied is that it is time for the RBI to prepare the financial markets with a glide path on rates. That would assure markets that bond yields in India will keep pace with the global reality. The RBI also needs to address how the aggressive borrowing target for FY23 will be met amidst rising yields. Clarity is what can fill the gap at this juncture and the RBI has to do it.