The Reserve Bank of India’s MPC meet minutes strike a more hawkish tone than the policy with governor Shaktikanta Das, underlining the need for continued monetary policy support for an economy that was been struggling to regain the momentum gathered in the second half of FY21.

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Speaking to CNBC-TV18’s Latha Venkatesh, Soumya Kanti Ghosh, Group CEA of State Bank of India, said, “Call rates have moved from today morning, but if you look into the broader rates, the one-year rates and the other rates, I think the 10-year yields have moved up just by one basis point and other yields have not moved up significantly. So, I am not sure whether MPC is having a palpable impact on the market at the short end.”

“I agree with the assessment in the MPC minutes that the short-term rates need to go up. The peculiarities of the market when the RBI had announced a monetary policy and the VRR, the objective was to push the short-term rates towards the repo rate. But if you look into the short term, one year rate, which was at 3.80 percent till that point of time, has now moved to 3.60 percent. The short-term rates have actually retreated towards the reverse repo instead of moving up towards the repo. Given the significant amount of reverse repo, 5.4 lakh crores, I think the RBI can take a call on moving up the reverse repo rate, even with an accommodative stance. What is happening is that the markets are unable to understand the direction of liquidity management and that is actually creating some sort of an imbalance in the rate differential at the short and the long end.”

Ghosh further said, “When the governor says it is time to pull the rug out of the market, I think there is a merit in the argument because the way the global commodity cycle is now collapsing, I think lumber prices have corrected 73 percent, steel and copper close to 20 percent and gold and silver prices are now closer to 52-week lows. Also, another simple thing is that if you look into all these arguments about taper tantrum, the US 10-Year yields have actually corrected 50 basis points as opposed to 2013 when it had gone up by 40 basis points. So, no one knows what is in the future. If global growth actually collapses, or it slows down, I think that will have a significant impact on the RBI rate raising cycle.”

On inflation, Ghosh said, “I think the inflation numbers, going forward, are still not likely to inch down. Remember, service inflation has 27 percentage weighted in CPI and that has not shown any inflation for the last one and a half years simply because the economy has not opened up. So I think inflation at 6 percent is still a number which is consistently on the higher side for now, more than 12 months.”

Abhishek Upadhyay, Senior Economist of ICICI Sec PD, said, “So, broadly, we have retained our view of liquidity adjustment facility (LAF) corridor normalisation beginning in December, we have held that view for quite some time and broadly because, if the stance has to be changed first, then market would straightaway start thinking about a full-blown rate hike cycle, which is something that the MPC RBI may want to avoid. And to that extent, the sequencing is consistent. The fact that there was so much discussion around it is a sign that this normalisation is not far away.”

For the full interview, watch the accompanying video.

(Edited by : Dipika)