Nifty bounced back on hopes of a Fed/RBI pivot and ease of Adani's pain

February RBI minutes show ongoing rate hikes at +25 bps till at least June’23 to keep pace with Fed and to bring down India’s sticky core inflation

India’s benchmark stock index Nifty made a 4-month low of around 17255.20 on 28^th February. Overall Nifty lost almost -8% since Dec’22 primarily due to global macro headwinds, higher borrowing costs, and sticky core inflation (both globally/U.S. and locally). Further Indian market was also affected by the Adani saga and related banks & financials, having significantly high exposure in various Adani groups. But Nifty also rebounded on hopes & hypes of a lower Fed/RBI terminal rate, India’s upbeat economic growths (despite higher borrowing costs), upbeat PMI, a mixed earnings report card for Q3FY24, and Adani boost.

Adani group of stocks included in Nifty (Adani Enterprise, Adani Ports) rebounded on favorable SC orders and renewed trust by some FPIs. The Indian SC has formed a committee to look into the veracity of various allegations by Hindenburg against the Adani group, while the latter sells a partial promoter’s stake now worth around Rs.154.45B ($1.87B) to U.S. firm GQG Partners. This shows that the stressed conglomerate Adani group may still raise capital, which in turn boosted banks & financials (such as SBI, ICICI, Axis, and Indusind Bank) having exposure to the group.

Subsequently, on Monday (6^th March), Nifty jumped to a high of around 17800 and closed around 17720. Nifty was also affected by banks & financials Monday on RBI’s new proposal of NPA provisioning, which may be effective from FY25 after due consultation with various stakeholders. Meanwhile, SEBI is removing all Adani groups of stocks from various Nifty-related indices and may also remove the same from Nifty-50 soon on account of abnormal volatility and very low public floating. Any serious regulatory action against Adani group may happen only after Nifty exclusion for the sake of financial (Dalal Street) stability.

On 28^th February, Indian government flash data (MOSPI) shows India’s real GDP for Q3FY23 was around Rs.40.19T vs 38.81T sequentially (+3.56%) and 38.51T yearly (+4.36%); i.e. the Indian economy has grown around +3.5% sequentially in Q3FY24, the same rate at Q2FY24, while yearly growth was around +4.4% against +6.3% in the previous quarter, and below market consensus +4.6%.

The MOSPI has also projected FY23 real GDP at around Rs.159.71T against the FY22 preliminary estimate of Rs.149.26T; i.e. an annual growth of around +7.0%. This should translate the Q4FY23 real GDP to around Rs.43.23T; i.e. a sequential growth of around +7.5% and yearly growth of around +5.1%. As per the long-term sustainable trend, Indian real GDP may grow around 1.50-2.00% on an average sequentially; i.e. an annualized rate of around 6.00-8.00% (y/y) under normal conditions.

On 1^st March, the S&P Global data shows India’s Manufacturing PMI edged down to a four-month low of 55.3 in February from 55.4 sequentially while pointing to the 20^th straight month of expansion (above boom/bust line 50.0). Both output and new orders grew for the 20^th month with the rates of expansion broadly similar to January, while foreign sales/exports increased the least in the current 11^th-month period of growth. Overall job numbers were little changed, amid a marginal rise in outstanding business.

Meantime, buying levels rose sharply and at a rate that outpaced its long-run average. Vendor performance was stable, as suppliers' capacity seemed adequate to keep up with improving input demand. On prices, input cost inflation accelerated to a four-month high but there was a softer upturn in selling charges. Finally, sentiment improved, attributed to hopes of demand strength that were supported by new product releases and investments.

On 3^rd March, the S&P Global data shows India’s Services PMI increased to a 12-year high of 59.4 in February from 57.2 sequentially, above the market consensus of 56.2 amid a sharp expansion in output and the best improvement in new business intakes in 12 years. Meanwhile, employment rose only marginally, with backlogs of work accumulating further. On the pricing front, input cost inflation eased to a 23-month low, while output cost inflation slowed to a 12-month low. Looking ahead, business sentiment deteriorated to a seven-month bottom, below the historical trend amid competitive pressures.

Finally, data from S&P Global shows India’s Composite PMI was up to 59.0 in February from 57.5 sequentially. The latest reading pointed to the 19^th straight month of growth in private sector activity. Services activities grew at a stronger rate than the manufacturing sector, but grow stronger in both cases. New orders expanded, as has been the case in 11 years, with services firms also registering a faster upturn in new business than their manufacturing counterparts. On prices, input cost inflation eased to a 29-month low, while prices charged went up the least in 12 months.

The S&P comments about India’s February Composite PMI:

"The service sector more than regained the growth momentum lost in January, posting the sharpest expansion in output for 12 years as demand resilience and competitive pricing policies underpinned the joint-best upturn in sales over the same period. Services companies were often able to leave their average fees unchanged amid retreating cost pressures. The latest PMI results showed the slowest increases in input prices and selling charges in 29 and 12 months respectively, with rates of inflation below their long-run averages in both cases.

"Despite the strong upturn in new business intakes, service providers noted only mild pressure on their capacities and, as a result, a large proportion of firms left payroll numbers unchanged. It seems that hiring growth was also dampened by a lack of confidence in the business environment. The degree of optimism recorded in February was the lowest for seven months and below the historical trend as some companies doubted demand would remain this resilient. Others displayed concerns surrounding fierce competition for new work."

Overall, the S&P Global PMI report for February indicates headline annual (y/y) inflation is again going hotter after easing in the last two months of 2022. The latest MOSPI data shows India’s annual inflation (headline CPI) jumped to +6.52% in Jan’23 from +5.72% in Dec’22, which was the lowest since Dec’21.

On a sequential basis (q/q), India’s headline CPI jumped +0.46% in Jan’23 from -0.45% contraction in Dec’22. India’s annual (y/y) core inflation (core CPI) surged +6.10% in Jan’23, almost unchanged sequentially.

India’s core inflation remains sticky/elevated at around +6.0% for the last year despite significant RBI rate hikes to curb demand. Indian consumer spending is still resilient despite the higher cost of living because almost 30% of the Indian middle-class population, equivalent to the entire U.S. population has stable jobs/income (government and reputed corporate employees), and has adequate real wage growths regularly. The wealth of many Indians is now growing rapidly, thanks to the vibrant stock & real estate market and digital ecosystem; i.e. there is a growing upper middle class.

Also, despite DEMO in 2016, the flow of black money in the Indian economy is still robust due to rampant corruption at almost all levels, especially in various infra projects (cut money) and even certain state levels of government employment. Thus, despite higher inflation, higher borrowing costs, and higher cost of living, the Indian consumer spending story is still robust, causing sticky core inflation. This coupled with targeted government fiscal stimulus (deficit spending, huge infra stimulus, and other CAPEX) is ensuring a robust Indian growth story, resulting in India as a ‘bright spot’ in the present global turbulence.

But India also pays almost 45% of its tax revenue as interest on public debt and over 40% on salary & pensions for government employees (including militaries/other agencies). Although a huge pool of government employees is also providing robust consumer spending (discretionary) amid real wage growths, job stability, and family pension security for a lifetime, India needs to control its sticky core inflation for relatively lower bond yield and lower borrowing costs for overall lower cost of living for the masses. Also, India needs to improve its innovation and productivity, which is the ultimate.

RBI, as a debt manager of the government, will have to also ensure lower borrowing costs by controlling bond yields directly/indirectly. Thus considering all the pros & cons, RBI may also pause after reaching a terminal repo rate of 7.00-7.50% by June-September’23 and may go for rate cut moves from early 2024, just ahead of the general election in India. Also, there may be severe summer this year in India and deficient rainfall due to the adverse EL-Lino effect. Thus, RBI may have to take an accommodative stance in early 2024 even after taking neutral from late 2023.

On 8^th February, as highly expected, India’s Central Bank RBI hiked all effective policy rates by +0.25% as expected by the market, which is a step down from earlier +0.35% and +0.50% (in line with Fed’s rate action). The RBI repo rate is now at +6.50%, at levels of Jan’19 after the 6^th consecutive rate hike since May’22, totaling +250 bps. RBI also raised the effective reverse repo rate (SDF-Standing Deposit Facility), MSF (Marginal Standing Facility), and Bank rate by +25 bps each to +6.25%, +6.75%, and +6.75% respectively.

RBI lowered its headline inflation (CPI) forecast for FY23 to 6.5% from 6.7% and revised India's real GDP growth to 7% from 6.8%. For the next FY24, RBI projected headline CPI to ease further to 5.3% with an economic (real GDP) growth rate of 6.4%. Some market participants were also expecting a clear message of pause by RBI after the December hike. But RBI didn’t convey any message of pivot (pause) and telegraphed another smaller/calibrated hike of +25 bps in the coming months by keeping an owlish stance on the evolving inflation dynamics.

RBI is quite worried about sticky core inflation around +6.00%, at RBI’s upper tolerance band, while upbeat about economic growth amid domestic resilience despite global macro headwinds and subdued merchandise export. Thus there is no concern about a hard landing and RBI may continue to follow Fed and hike rates to bring down core inflation towards 4% targets.

The U.S. economy is now slowing down, but price pressure/core inflation and the labor market are still substantially hot. And the Fed is now clearly preparing the market in a calibrated way for a 5.50% terminal rate by June’23 and then a pause to assess. Fed will ensure price stability along with financial/Wall Street stability avoiding a hard landing. Fed will keenly watch the core inflation trajectory for Q1CY23 and then make a fresh SEP on 16^th March for the projected terminal rate for 2023 (after reaching +5.00% repo rates).

As per Taylor’s rule, for the US: (Pointed out by Fed’s Bullard several times)

Recommended policy rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(5.5-2.00) =0+2+3.5=5.5%

Here for U.S. /Fed

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation=5.5% (average of core PCE and CPI)

The market has now almost fully discounted Fed repo terminal rate +5.50% by June’23; i.e. consecutive further rate hikes +25 bps each in March, May, and June. The Fed may go for a pause after June’23 for the next 6 months to assess the impact of cumulative tightening on the overall economy, labor market, consumer demand, and inflation. Fed may hold rates/FFR around +5.50% till at least June’24 before seriously beginning any debate for rate cuts (ahead of Nov’24 U.S. Presidential election), if core inflation indeed goes down towards +2.00% targets or even fall below +3.00% with a definitive dis-inflationary trend.

India’s RBI may also hike +0.25% on 6^th April and further +0.25% in June for a terminal rate of 7.00% against the Fed’s 5.50%. India’s core CPI continues to be sticky around +6.00% and thus RBI wants to ensure a real positive rate, by at least +100 bps (restrictive levels) wrt at least average core inflation.

Thus RBI will continue to tighten to keep interest rate/bond yield differential and also USDINR under control, which will also control imported inflation and manage overall price stability. RBI has to tighten in a calibrated way to bring inflation down by curtailing demand; i.e. slowing down the economy to some extent without causing an all-out recession for a safe and soft landing.

As per Taylor’s rule, for India:

Recommended policy rate (I) = A+B+(C+D)*(E-B) =0.50+4+ (1.5+0)*(6-4) =0+4+1.5*2=0.50+4+3=7.50%

Here for RBI/India:

A=desired real interest rate=0.50; B= inflation target =4; C= permissible factor from deviation of inflation target=1.5 (6/4); D= permissible factor from deviation of output target from potential=0; E= average core CPI=6

If Fed continues to hike even after June’23 to +6.00% by Sep’23 (in case U.S. core inflation surges more), then RBI also has to hike (under still elevated/sticky core inflation). Thus RBI may like to keep the repo rate at 7.00% to 7.50% in CY23, depending upon the Fed rate action; as USD is the reserve/global currency, every major Central Bank has to follow Fed action to maintain bond yield/currency and policy differential (whatever may be the narrative) to control imported inflation.

On 22^nd February, RBI released the minutes of the Feb’23 MPC meeting, which shows RBI may continue to hike at 25 bps at least until June’23 in line with the Fed. RBI is quite concerned about elevated core CPI around +6% substantially higher than the target of +4%. As India’s economic growth and outlook are still robust, RBI has no problem hiking further to control demand and inflation. RBI now thinks price stability is the bedrock of the economy and sustainable inclusive growth.

Important Highlights of a statement by RBI MPC members:

Bhide: External MPC Member (sounded hawkish)

·         The persistence of core inflation at a high level is a crucial concern at this stage. It is important to reduce the demand side pressures on inflation and bring the inflation expectations of the various stakeholders closer to the policy target to sustain the growth momentum

·         In view of the above, I vote (1) to increase the policy repo rate by 25 basis points and also (2) to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth

Goyal: External MPC Member (sounded dovish)

·         Central Banks around the world had to raise rates fast to reverse large pandemic time cuts once inflation rose. But high inflation has not persisted as long as in the seventies so long-run inflation expectations largely remain anchored. Normalization of supply chains, softening commodity prices, and falling global demand are bringing inflation down in most countries

·         US Fed communication on ‘higher for longer’ independent of data may not be appropriate and has mellowed somewhat. The economy seems to have survived sharp tightening well, as better growth compensated for higher rates

·         Crashing markets would be a very costly way to get policy transmission. Pressure on emerging market (EM) currencies and inflation from dollar appreciation has reduced

·         Since there are still few signs of wage or demand-led second-round effects on inflation, however, the core may soften over the year. There are signs of the latter in some core components (transport, textiles, and recreation and amusement services). Since firms have benefitted from a reduction in international input costs and demand is also slackening they may hesitate to raise prices

·         The WPI includes firm-level prices and WPI inflation has fallen steeply. As the aggressive MPC tightening is more fully passed through it will further reduce demand. The interest elasticity of output is high in India because of a large young population buying flats and equipping them with credit

·         The real rate is already positive and is likely to become more so if inflation falls. The RBI’s average inflation forecast for FY24 of 5.3 percent gives a real interest rate of almost unity with a repo rate of 6.25 percent. It can rise above this if inflation comes in below expectations that are based on an oil price of $95, risking a pro-cyclical stance as policy tightens despite pressures on growth. The policy would then have moved away from the nuanced countercyclical stance that has been very effective in smoothing recent external puri-shocks. Market inflation expectations are below those of the RBI. The Bloomberg consensus forecast is 5 per cent

·         A real repo rate of around unity suits the current stage of the cycle. It also balances the conflicting requirements of inflation and growth, savers and borrowers, well. It ensures nominal rates rise with expected inflation as is required in inflation targeting but prevents large nominal volatility. Research shows it is better to limit volatility so that real interest and exchange rates, that impact the real sector, do not deviate much from their equilibrium values. Some volatility of nominal rates is good for financial stability, as long as volatility is limited

·         The US Fed is expected to over-correct and cut after. But it is only short-term market players who benefit from excess volatility and overshooting of exchange and interest rates, which hurt the real sector as well as those who take market positions based on fundamentals

·         When the Fed is tightening, interest rates tend to rise more for EMs that have sharp currency depreciation. Intervention in FX markets has lowered rupee volatility and helped maintain independence from the Fed stance. Reserves have also recovered. Fed action is due to large excess demand, tight labor markets, and an unprecedented deviation from the inflation target. India does not have these conditions and has the space not to follow the Fed. It also started from higher nominal policy rates

·         If a sharp rise in the real policy rate, substantially above unity, triggers a shift to a lower trend of private investment and growth, then the sacrifice ratio of disinflation can be very high, as it was in the 2010s. When such multiple paths exist, over-tightening today does not necessarily improve the future. Inflation can rise over time because supply bottlenecks worsen

·         Excessive front-loading of rate hikes carries the risk of over-shooting that is best avoided for compelling reasons in the Indian context: First, raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Second, since there are more lags in monetary transmission in India, over-shooting can have persistent deleterious effects here, including instability. Third, macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates and counter external shocks. The Indian economy is well-poised to achieve this combination and reduce its chronic underemployment

·         In view of these arguments, I vote for a pause. It is better to give time for possible softening of both inflation and growth and for the effects of past monetary tightening to play out. I am also in favor of a shift to a neutral stance which is consistent with a response in any direction as required depending on the impact of global and domestic factors on expected inflation. Policy, and market adjustments, would be based on incoming data and its effect on the future outlook

Varma: External MPC Member (sounded dovish)

·         In the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for that in terms of unacceptably high inflation in 2022-23. In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24

·         I believe that the 25 basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns. I, therefore, vote against this resolution

·         Turning to the stance, I believe that a repo rate of 6.50% very likely overshoots the policy rate needed to achieve price stability, and further tightening is not desirable. I, therefore, vote against this resolution also

Ranjan: External MPC Member (sounded hawkish /owlish)

·         Core (CPI excluding food and fuel) inflation edged up above 6.0 percent while other exclusion-based core inflation measures were in the range of 6.0-6.8 percent. Trimmed mean measures of inflation and diffusion indices for CPI suggest heightened underlying and generalized inflation pressures across the CPI basket

·         Our inflation projection is premised on crude prices at US$ 95 per barrel. I believe it is necessary to remain conservative on crude prices and avoid best-case scenarios given the volatile nature of crude prices, the progressive opening up of China, and the continuing war in Europe. Moreover, with retail petrol and diesel prices unchanged, the sensitivity of inflation to crude oil price movements is low in the short term but remains relevant for the external sector

·         On the other hand, I am reasonably convinced about the inherent strength of the Indian economy as reflected in (i) high-frequency indicators; (ii) resilient domestic demand; (iii) budgetary focus on capital expenditure; (iv) sound health of corporates and banking sector; (v) improving external sector indicators; and (vi) depth of the financial markets

·         Moreover, February 2023 has been a defining moment for fiscal monetary coordination, which has been the hallmark of the pandemic. Fiscal expansion through higher expenditures can stimulate or retard growth depending upon the phase of the business cycle and the quality of expenditure. The government has continued on the path of fiscal consolidation in the Union Budget 2023-24 by reprioritizing expenditure from revenue to capital, which will be growth augmenting through a higher multiplier effect of investment over the medium term

·         Thus, the Union Budget served the macroeconomic objective as well as the inflation-targeting mandate of the Reserve Bank. Prudent fiscal and monetary policies at this juncture are likely to give us the optimal macroeconomic outlook – a soft landing for the economy through gradual disinflation amidst resilient growth outcomes. The growth projection of 6.4 percent for 2023-24 reflects these underlying strengths. The quarterly momentum in the projection of real GDP is now close to that of the pre-COVID decade

·         In the above context, it will be hasty to ease the vigil against inflation. As noted by Milton Friedman, there is a distinction: “...between a steady inflation, one that proceeds at a more or less constant rate, and an intermittent inflation, one that proceeds by fits and starts...”. This crucial difference between “steady inflation” and “intermittent inflation” is paramount while formulating the policy choice

·         The overly large focus on the recent fall in inflation led by “intermittent inflation” may tempt an untimely pause in monetary policy action, a costly policy error. The continuously high core inflation points to the persistence of “steady inflation”, which warrants caution. Thus, it will be premature to pause when there are no definitive signs of a slowdown in inflation, particularly core inflation. Nevertheless, as the policy rate adjusted for inflation has now turned positive, albeit barely so, there is a case for paring down the pace of rate hike to the usual 25 bps

·         These factors call for continuity in policy stance and response, to ensure a decisive and durable moderation in inflation towards the target, while keeping in mind the objective of growth. Because of the above, I vote for a lower rate hike of 25 bps without changing the stance. Going ahead, assessment of the impact of the cumulative rate hikes will become important especially in view of higher policy transmission in a primarily bank-based economy

Patra: Deputy RBI Governor (sounded hawkish)

·         Over the year gone by, monetary policy actions have been undertaken and accommodation has been withdrawn to restore price stability. The impact of these actions is beginning to be reflected in the channels of transmission. This provides little comfort though, as barring the pronounced winter easing of vegetable prices, almost every other component of the consumer price index is showing a hardening of price pressures. Statistical and exclusion-based measures of underlying inflation are actually showing an uptick

·         It is eminently likely that as the cooler weather gives way to summer, vegetable prices will turn up again as they usually do. Households sense this, as revealed in largely unchanged inflation expectations and muted discretionary spending, especially in rural areas. Businesses are accordingly encountering a moderation in sales and revenues. With input cost pressures still being passed through into expenditures, capital spending remains restrained

·         Hence, the stance of monetary policy will need to remain disinflationary till inflation is returned to target. The Indian economy has demonstrated strength in the face of formidable global adversities and there is positive momentum underlying the steady emergence from the drag of the pandemic and the war

·         While the full effects of monetary policy actions on economic activity are yet to be seen, increasingly it is becoming evident that inflation is weakening domestic consumption and investment as well as confidence. Combined with the drag on exports due to the retarding effects of slowing global activity, and the expected consolidation of fiscal spending, the prospects for growth in 2023-24 hinge around price stability, anchoring inflation expectations and improving supply responses across agriculture, industry, and services

·         Although it seems to have peaked, inflation remains high and, in my view, it is the biggest threat to the macroeconomic outlook. Restoration of price stability – as statutorily mandated – will provide a solid foundation for a growth trajectory that actualizes India’s potential. Taking into account the height of inflation, current and projected, monetary and financial conditions still reflect some slack, although they are moving into tighter territory with the follow-through of recent monetary policy actions. The issue is one of timing

·         The fight against inflation is complicated by the global outlook. There is some consensus growing around a milder slowdown than earlier feared, although geographical disparities complicate the prognosis. Be that as it may, the outlook for global inflation is turning more uncertain than before. While central banks expect only a stubborn easing, financial markets are betting on a more dramatic downturn as commodity price pressures ease and supply chains improve. Nonetheless, future shocks associated with the war and the pandemic are possible

·         Turning to the implications for policy, the MPC has to remain committed to its primary mandate. The recent experience has amply demonstrated that low and stable inflation is the credible nominal anchor for a reinvigoration of growth. Moving the policy rate into the restrictive territory at a resolute pace has provided the headroom to continue to moderate the order of rate increases. This enables us to assess the impact of our actions carefully while taking into account the risks around the outlook. It also demonstrates the credibility of our actions through carefully calibrated rate changes without any backtracks

·         In the final analysis, the size and timing of rate changes are the best embodiment of the stance. While keeping in mind the objective of growth, the foot must remain on the brake as we chart our future trajectory. On a pragmatic basis, it is important to at least contain inflation within the tolerance band in 2023-24 as the first milestone to be passed in aligning inflation with the target. Accordingly, I vote for increasing the policy rate by 25 basis points while continuing to withdraw accommodation

Das: RBI Governor (sounded hawkish)

·         The global economic outlook has improved since the December (2022) meeting of the MPC. Inflation in major countries has eased in recent prints but remains significantly above their respective targets. Monetary policy is thus expected to remain in a tightening mode, but there is uncertainty about its trajectory. This is leading to bouts of volatility in global financial markets whose spillovers are posing challenges to emerging market economies

·         In a world of extreme uncertainty, India is witnessing a conducive environment of macroeconomic stability: the economy remains resilient; inflation has moderated in the past two months to below 6 percent; fiscal consolidation is gaining traction; current account deficit is showing signs of moderation; forex reserves have improved; and the banking sector remains healthy

·         The sustained buoyancy in domestic demand, especially private consumption and investment, is driving growth. While weak external demand is a drag on our merchandise exports, the growth of remittances and exports of services is robust. Going ahead, the persisting recovery in contact-intensive services and good prospects of rabi production are likely to support urban and rural consumption. The enhanced thrust on capital spending and infrastructure in the Union Budget 2023-24 should bolster manufacturing and investment activity

·         CPI inflation has moderated primarily due to lower vegetable prices. Core inflation (i.e., CPI excluding food and fuel), however, is elevated and sticky at around 6 percent. CPI inflation excluding vegetables has moved higher

·         Going forward, the baseline projections indicate that headline inflation is likely to moderate to 5.3 percent in 2023-24. These projections also indicate that the disinflation toward the target rate is likely to be protracted given the stickiness of core inflation at elevated levels

·         The durability of a disinflation process cannot solely rely on food inflation, given its uncertainty and susceptibility to weather events. Overall, there is considerable uncertainty at this stage on the evolving inflation trajectory due to ongoing geopolitical tensions, global financial market volatility, rising non-oil commodity prices, volatile crude oil prices, and also weather-related events

·         We must, therefore, remain unwavering in our commitment to bring down inflation to ensure a decisive and durable moderation in inflation towards the target of 4 percent over the medium term, while being mindful of growth. Hence, further calibrated monetary policy action is necessary for the current MPC meeting to keep inflation expectations anchored and break the persistence of core inflation while containing second-round effects

·         I also believe that we should taper the pace of rate hike because of two considerations: (i) we need to give time for our past policy actions to work through the system; and (ii) it would be premature to pause, lest we are caught off-guard and need to do a catching up later. I, therefore, vote for an increase of 25 basis points in the policy repo rate to 6.50 percent. This order of rate increase provides space to calibrate future monetary policy actions and stances based on evolving macroeconomic conditions

·         Our actions have nudged the policy rate adjusted for inflation to positive territory after a while. Liquidity remains in surplus mode, even as the surplus is moderating. The overall monetary and liquidity conditions, therefore, remain accommodative. In such a scenario, it is necessary to persevere with the stance of withdrawal of accommodation to ensure a decisive process of disinflation. Accordingly, I vote for continuing with the stance of withdrawal of accommodation

·         There has been some discussion in the public space about the need to give forward guidance on monetary policy actions. As I have stated on several occasions, it would be inadvisable to provide specific guidance when we are in a tightening cycle and when we are experiencing such extreme uncertainty. The only forward guidance that we can provide is that we will remain vigilant, monitor every incoming information and data, and shall act appropriately to maintain price stability in the interest of strengthening medium-term growth

Bottom line: SGX Nifty Future: 17850 as of 07/03/23-Pre-European session

Looking ahead, whatever may be the narrative, technically SGX Nifty Future now has to sustain over 18000 for a further rally towards 18175/375* and a further 18450/555-675/19050 in the coming days; otherwise sustaining below 17950, Nifty Future may again fall towards 17700-600/500-450/350* and further 17240/200-16950/650 levels in the coming days.

Wall Street –as well as Dalal Street, will now focus on Fed Chair Powell’s semi-annual Congressional testimony on 7^th March (before Fed’s blackout period) followed by NFP job and inflation reports on 10^th and 14^th March before Fed’s monetary policy day on 22^nd March. If Powell sounds less hawkish than expected along with softer job and inflation data, Wall Street as well as Dalal Street may also zoom further and vice-versa.

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