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Right policy mix a challenge for RBI

The RBI’s Monetary Policy Committee (MPC) huddles this fortnight to review benchmark rates just when global central banks are going separate ways, scattering policy decisions to the four winds.

Published: 21st November 2021 08:00 AM  |   Last Updated: 21st November 2021 08:00 AM   |  A+A-

RBI

Reserve Bank of India (Photo | PTI)

Express News Service

The RBI’s Monetary Policy Committee (MPC) huddles this fortnight to review benchmark rates just when global central banks are going separate ways, scattering policy decisions to the four winds.

For Governor Shaktikanta Das, the forthcoming meeting, coming at the fag end of his first term — during which time he unabashedly remained dovish — will be critical. Timing is everything and when and how he moves the marker on repo or reverse repo rates and policy normalisation will determine not just the success of his second term, but also the resurrection of the Indian economy. 

Unlike last year, when global central banks were on the same page be it on rates, asset (bonds) purchases or inflation trajectory, an unmistakable dichotomy prevails now with some initiating tapering, some increasing policy rates at an unusual clip, while still others hold on to both accommodative stance and asset purchases. Only time will tell, who gets the policy mix right. 

Among emerging markets, Brazil remains the most hawkish central bank, raising rates for the sixth time since March and at a much higher magnitude of 150 bps -- the highest hike in almost 20 years -- taking the cumulative increase in 2021 to 5.7%. Russia too, effected its sixth consecutive rate hike but at a lesser magnitude of 75 bps. The cumulative increase stands at 3.25%. Among others, Hungary raised rates by 15 bps, its fifth consecutive hike, while Chile effected its third consecutive rate hike at a higher magnitude of 125 bps last month. Poland increased rate for the second consecutive month by 75 bps, while the Czech republic effected its fourth rate hike, again at a much higher magnitude of 125 bps.  In a sharp departure, Turkey has cut its rate by 200 bps. This is its second rate cut (400 bps cut in September), taking the cumulative rate change to (-)100 bps in 2021. 

On the other side are advanced economies, who have begun policy normalisation, though a change in policy stance or rates may have to wait. The US Fed announced tapering of its asset purchases of $15 billion per month as against its $120 billion monthly asset purchases. The Bank of Canada too ended its weekly bond-buying programme of C$2 billion, while the Reserve Bank of Australia dumped its policy of yield curve control as a signal to act against a post-pandemic surge in prices. The Monetary Authority of Singapore too tightened its policy by allowing the Singapore dollar in nominal effective terms to appreciate mildly.

But the European Central Bank was an outlier, holding on to its accommodative policy stance and also continuing with asset purchases. So was the Bank of England, which kept its policy rates and asset purchase programme unchanged confounding market expectations of a rate hike. One of the reasons for the divergence is inflation and its effects on individual economies. Among major BRICS economies, inflation in Russia continued its upward trajectory, climbing to 8.1% in October, its highest level since January, 2016 forcing its central bank to rein in on price instability.

In Brazil, prices inched up 10.7% in October, staying in double digits for second consecutive month. In China, producer price inflation touched a 26-year high amid soaring raw material costs. Headline inflation in the Euro area shot up to 4.1% in October, and the US CPI jumped to a 31-year high of 6.2%, while the Fed’s preferred measure of inflation (measured by the personal consumption expenditure (PCE) price index data) continued to rule at a 30-year high and edging up to 4.4% in September, as energy and food prices to continue to spiral. 

Inflation in India remains sticky, but RBI, in its monthly bulltien noted that the Indian economy was clearly differentiating itself from the global situation. Given the uncertainty with headwinds from multiple fronts and amid nascent recovery, it believes, there’s a risk of faster policy normalisation by major central banks leading to tightening of financial conditions and stifling of growth impulses. The MPC members’ views on ‘premature tightening’ will be closely watched.

Global central banks not on same page this time
Unlike last year, when global central banks were on the same page be it on rates, asset purchases or inflation, an unmistakable dichotomy prevails now with some initiating tapering, some increasing rates, while others hold on to accommodative stance and asset purchases



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