InvestorQ : What do you see as the big challenge in front of the RBI for monetary policy?
Katherine Gonsalves made post

What do you see as the big challenge in front of the RBI for monetary policy?

rhea Babu answered.
2 months ago

The way I look at it, there are two major challenges to the RBI as it embarks on rate hikes. This is a problem for the US too. In fact, former treasury secretary, Larry Summers has pointed out that there is a distinct possibility that too much hawkishness from the Fed could result in a recession. That is a potent risk in the Indian context also. At the end of the day, the RBI has the twin challenges of managing the market narrative and avoiding a recession.

What do we understand by managing the narrative? Market volatility is normally caused by the gap between perception and reality. Hence, the RBI must ensure that the market is shown a glide path on rates instead of arbitrary decisions as that would give more comfort for the financial markets. The 40 bps rate hike may have taken the markets by surprise but it surely prepares them for a more hawkish RBI approach in future, and that is the message.

But, the real challenge is that the Indian economy has just about grown by 1.95% in IIP over pre-COVID levels and this advantage cannot be forsaken. India also runs a different kind of risk amidst rising rates, apart from the R-word. When RBI embarked on rate hikes in 2018, the tightness in money markets caused implosion of ILFS and DHFL. This time, markets will take another 75 bps hike in the stride as it would only reverse the COVID rate cuts.