By Ruma Dubey

The only thing predictable about Mr.Rajan is his unpredictability.

It threw everyone off the track; doing the unexpected, when all expected a status quo, RBI hiked the repo rates by 25 bps to 8%. Understandably, the markets slipped into the red. But it did not crash because the Mr.Rajan ruled out any further rate hikes in the near future. He has said, “The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.” This came in as a great relief and there is now a glimmer of hope that maybe, if inflation moves as expected, this might truly be the end of the rate hikes.

This rate hike is keeping in line with the Urjit Patel report where the RBI is looking at a shift from WPI to CPI and priority remains price stability though the Governor did voice concern over the falling growth. The forward guidance given by RBI is dovish and this would be highly data dependent. A “dovish” stance means there are no aggressive undertones to the document. On the other hand, a “hawkish” tone would have meant the exact opposite and that tone at this juncture would have culled the sentiments further. Thus the tone was more positive than more negative.

As usual, there remains the overhang of the FOMC meeting and there is expectation that we could see a fastening in the pace of tapering. Yet, the way in which the market is reacting, seems more like an overreaction. Yes, we should be prepared to see dollars moving out of the emerging economies. It might not be a deluge as was once expected; there will be some pullback and that time would be crucial – for both the equity as well as the forex markets. RBI might have to wait till such time to ease tightening measures to ensure the rupee does not come crashing down further. Maybe we should be prepared for more pain over the next few weeks. But at the end of it, we should know that this outflow will stop. India continues to remain an opportunity which the FIIs simply cannot afford to ignore.  Yes, we have our issues but it is still not a banana republic. There are very sound companies working and listed in India. And simply put- FIIs have made money in India and that lure of money will get them back. Also, India is an emerging economy which simply cannot be ignored.

For now, all eyes will shift from Mint Street to Wall Street, onto the FOMC meet to get indications on further QE easing. Till that clarity does not come, the markets and moods will remain lackluster.

Highlights of RBI’s Credit Policy

• Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 8.0 per cent.

• Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL).

• Consequently, the reverse repo rate under the LAF stands adjusted at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

• Some loss of momentum of growth is likely in Q3 of 2013-14, despite a strong pick-up in rabi sowing. Fiscal tightening through Q3 and Q4 is likely to exacerbate the weakness in aggregate demand. Lead indicators of services suggest a subdued outlook, barring some pick-up in transport and communication activity.

• Despite a significantly more comfortable external position than in the summer of 2013, both fiscal and monetary authorities need to continue their efforts at macroeconomic stabilisation.

• The Dr. Urjit Patel Committee has indicated a “glide path” for disinflation that sets an objective of below 8 per cent CPI inflation by January 2015 and below 6 per cent CPI inflation by January 2016. An increase in the policy rate will not only be consistent with the guidance given in the Mid-Quarter Review but also will set the economy securely on the recommended disinflationary path. The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.

• If policy actions succeed in delivering the desired inflation outcome, real GDP growth can be expected to firm up from a little below 5 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15, with risks balanced around the central estimate of 5.5 per cent. 

• Hereafter, following the recommendation of the Dr. Urjit Patel Committee, monetary policy reviews will ordinarily be undertaken in a two-monthly cycle, consistent with the availability of key macroeconomic and financial data. Accordingly, the next policy review is scheduled on Tuesday, April 1, 2014.