What will the future rate trajectory going to be from RBI? Abheek Barua answers

"I would tend to see that the broad message of the policy as very much in line with expectations, very justifiably highlighting inflation risks, revising the Q2 numbers and so forth," says Abheek Barua, Chief Economist, HDFC Bank.

Was the stance really that hawkish for the market to fall the way it is because it is pretty much along expected lines?
Yes, you described the key elements of the policy but one thing that you did not sort of refer to was this incremental CRR. It might be temporary, it could just be viewed as a technical measure but if you see it as an additional monetary policy signal and sort of a tightening signal at that, indicating that the RBI is not comfortable with current levels of liquidity, whatever the drivers may be, then I think that is the bit which was not priced in by the market.

I think that bit, whether you see it as a signal, whether you see the impact on the cost of funds for banks, etc, is a surprise.

I would tend to see that the broad message of the policy as very much in line with expectations, very justifiably highlighting inflation risks, revising the Q2 numbers and so forth.

But I think this additional bit came as a bit of a surprise and the market is seeing this as a further proof of the RBI's hawkishness, you could call it hawkishness or its commitment to bring inflation down to the 4% level in the medium term.

And if you just look at the numbers that they have put down in terms of the forecast, it is sort of way off the 4% mark which also suggests that rates will be on hold or possibly even higher if conditions warrant for longer. So, I would read the market's somewhat unexpected reaction as a response to these developments.

Just wanted to get your sense in on where do you think the next course of action is going to be? The governor is pretty confident that the inflation is a short-term phenomenon and once the weather disturbances, monsoons are all out of the way, the prices should see a significant cool-off. But in that light, assuming that that happens on course, what do you think the future rate trajectory is going to be from the RBI?
Look, I kind of disagree with your interpretation of what the governor said. The governor said that, look, food and other things might be, I mean, vegetables, tomatoes, potatoes might be transitory but there are El Nino related risks which global food markets are tight, etc, so we might have a problem that extends beyond this transitoriness of vegetable prices.

At this moment, we are assuming that the monsoons are normal. We are assuming that El Nino does not have a major impact and hence this is our forecast.

You must remember that food inflation has a major impact on inflation expectations and that is the bit that bothers central banks. So, well if it all peaches and cream and tomatoes and onions prices come down and everything goes back to the past level, although the trajectory would be a little higher, then we are fine.

But if we have additional problems on the food side, then the RBI might be forced to act. So, in the best case no further action for the rest of the year. This liquidity action turns out to be a purely sort of technical transitory move, rolled back in September, but given the 4% target and the continued emphasis on that rates might not before 4%, a lot of other factors are at play, I am not going into that -- the Fed, US CPI, etc, but if things turn out to be not as rosy as the baseline scenario is painting and you have a problem with cereal prices, pulses prices, oil prices, I am talking about cooking oil if they remain elevated, then we have a different story and let me just be a little bold and say maybe a rate hike is not off the table going forward.