Let me begin with your take on the India CPI data. It was expected to be below 6%. Are we seeing a base effect in play or is there now some real relief on the horizon?
There is an element of base effect, undoubtedly. Nevertheless, softening of the headline inflation is still very-very good news. And also, if you see, it is not only softening in the headline inflation below 6% towards closer to the market expectation in this particular round, there has also been perceptible softening in core inflation number also, which was bothering the central bank for a while. Now what is very important here is all of a sudden we are seeing a patch where the real policy rate seems to be something like 100 bps higher compared to where it was still a few days back. So overall pretty good news
Too early for the Fed to declare victory, too early for all central banks to declare victory that is really the real question. Their efforts are paying off, we are seeing inflation cool off, but if you look at the IMF projections also from yesterday, they say inflation is not coming down as fast as expected. Will that still be a bit of concern as far as central bank action is concerned?
Well, absolutely. This is some bit of early, one particular battle won you can say, but the war is still not over. So central banks in today’s world, given the complex and volatile situation, cannot really take it easy. They have to be very-very vigilant on a number of aspects.
Now, if you look in the context of US also, I think a very important factor is that while the median expectation is that the Fed will be hiking just one more time, you cannot ignore the fact that seven out of 18 of Fed governors are actually talking about more than one more hike. So some of them are calling for two more hikes from here, some are calling for three more hikes, and there is at least one governor who is calling for four more hikes. So the important factor is to figure out over the course of the next few weeks and months, how exactly the Fed dot plot will change, how is the expectation about Fed policy changing over the course of the next couple of months.
So if Fed indeed stops after delivering one more hike, I think from an RBI’s point of view, it will be seen as some kind of a relief and some kind of a breathing space. If there is an indication that Fed continues beyond one more hike, then possibly there is a different story altogether.
Over the course of the last few months what has also allowed the central bank to breathe slightly easy is the improvement in the trade account and current account deficit and that is why some kind of a relatively more stable currency. I think that has also provided the Indian central bank a little bit of confidence and it is very important that we continue to see that persisting over the course of the next few months. My sense is that that will persist. We were very vocal about expecting a pause in this particular policy, which turned out to be the case. My sense is that the bar for getting into a fresh round of hiking on the part of RBI is relatively high but if for whatever reason, global inflation disappoints on the higher side or Fed starts talking about hikes beyond one more hike, then it will be a very different scenario altogether, a couple of months down the line.
