InvestorQ : What is the RBI minutes of the meeting indicating? Should the RBI stick to its stance of hiking rates or should it stop?
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What is the RBI minutes of the meeting indicating? Should the RBI stick to its stance of hiking rates or should it stop?

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sarah Leo answered.
1 month ago
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The actual answer may be a tad more complicated than that. Here are some basic factors to understand before taking a view on what the RBI should be doing on rates going ahead.

· It is true that the Fed hawkishness has had limited impact on retail inflation. For instance, the hawkish stance of the RBI led to IIP growth falling to -0.83%, but retail inflation has only gone higher to 7.41%.

· But that is just part of the story. The real story is that despite the hike in rates, the rupee has not gained value but has instead lost value. It has weakened to an all-time low of 82.5/$. There the US type strategy of tightening to curb inflation does not seem to be working. At least, in the US the dollar is gaining strength, not the case in India.

· One important point is that the MPC minutes indicate that members are finally getting cautious. In fact, MPC member Ashima Goyal called it a global over-reaction to inflation. She opposed 50 bps rate hike and called for lower rate hikes to give a breather to IIP. Even Jayant Varma suggested RBI stop rate hikes in the range of 5.90% to 6.00%.

· The real concern is not just about inflation, but about inflation expectations that the RBI is actually trying to manage. In fact, inflation expectations in India are only trending higher since July and that is not a very good signal for the markets.

· Coming back to the rupee weakness, it is about capital outflows but also about the fact that the rupee does not have the exorbitant privilege of the dollar. Unlike the dollar, the INR is not a preferred currency of choice for global trade and commerce. That is one reason why rate hikes appear to have no palpable impact in India.

· Let us not lose sight of the bigger picture. While CPI inflation may not have been impacted, WPI inflation has been consistently tapering since May and it is down by nearly 600 basis points. Transmission to CPI inflation is also likely to manifest sooner rather than later. But, the moral of the story is that India must not lose sight of its growth goals, which remains its USP.

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