Does the RBI also need to talking hawkish like the US Fed?

While the RBI has opted to keep the rates static and observe the data for some more time, there are some thing that the RBI cannot overlook. It is not juts about rates and liquidity but also about the borrowing program of the government. Budget 2022 has increased the borrowing target for FY23 by 25% to Rs.14.95 trillion. The moral of the story is that India will be in a sort of quandary as raising rates will have a spill-off impact on borrowings.

RBI cannot afford higher rates but at the same time it will have to pave the way for higher rates if global monetary policy becomes too hawkish. The problem is foreign flows. FPI flows are a big driver for India and if rate divergence is very high, expect outflows from debt and equity, apart from rupee weakness. The sum and substance is that Indian markets have not choice but to live with the volatility. What can the RBI do in this context?

The best way is to prepare the markets for eventually higher rates via a glide path. The quantum of first hike in the US and the language of the Fed will be the key in the 17-Feb minutes of the FOMC meet. It is time for RBI to caution the markets that rates cannot be low forever. Above all, RBI needs to address how the aggressive borrowing target for FY23 will be met amidst rising yields. RBI must provide guidance to markets on these queries.