An additional meeting of the MPC is being scheduled on November 3, 2022, to prepare its report on missing inflation targets and submit it to the government.
As reported by the media, the Reserve Bank of India (RBI) will submit a report to the government on its failure to keep the retail inflation rate below 6% for three consecutive quarters beginning January 2022.
This is the first time since the implementation of the monetary policy framework in 2016 that the RBI's rate-setting panel will need to submit its report on inflation to the government.
As a PTI report highlighted, the monetary policy framework, which came into effect about six years ago, mandates the RBI to maintain retail inflation at 4% with a margin of 2% on either side.
In case of failure to maintain the inflation target for three consecutive quarters, the central bank, under section 45ZN of the RBI Act, is required to submit a report to the government explaining the reasons and spelling out the remedial actions it would be taken to check the price rise.
Inflation, which shot up after the Ukraine war, has emerged as one of the biggest economic concerns across the globe. Central banks have started lifting rates aggressively, raising concerns over a sticky recession in the West.
Can the RBI upset the market?
RBI, like its global counterparts, is visibly worried about soaring inflation. Since April, it has been lifting rates to bring inflation below its tolerance band of 6%. However, the efforts have not fetched desired results so far.
The RBI is unlikely to take any action on the rate hike front on November 3. There is hope that inflation has peaked in the country. All eyes will be on RBI Governor's commentary on inflation to get a clue on that. Analysts do not expect any negative surprise from the RBI on November 3.
"September CPI inflation came in at 7.41% year-on-year (YoY). Inflation seems to have peaked and likely to trend lower from current levels and come within the MPC inflation band latest by Q1FY24," said Deepak Agarwal, CIO (Debt), Kotak Mahindra Asset Management Company.
Agarwal pointed out that the RBI has hiked the repo rate by 190 bps since April 22 in order to ensure positive real rates and bring down inflation within the mandated band. MPC voted 5:1 to increase rates by 50 bps in September 2022. Dr Goyal voted only for a 35 bps rate increase. The MPC minutes indicated Professor Varma’s assessment that the MPC should pause and take stock after the Sep 22 policy.
“Even though the MPC is the next day after the Fed meeting, where is Fed is likely to raise rates by 75 bps, we believe the November 3 MPC meeting is to discuss the report to the government under section 45ZN and we assign a low probability of rate action in the said meeting,” said Agarwal.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes that the RBI is unlikely to upset the market.
“There are expectations that the Fed might signal moderation in rate hike after its meeting on November 1 and 2. What can upset the market would be a continuation of the ultra-hawkish stance of the Fed. The MPC is sure to hike the rate after the November 3 meeting, but its impact on the market is likely to be minimal,” said Vijayakumar.
The market dislikes negative surprises. A commentary which indicates inflation is not likely to come under control soon and rate hikes will continue for a prolonged period will most likely trigger a selloff in the market.
“Any hawkish outcome post the US Fed meet or any unexpected rate hike by the RBI MPC at its November 3 meet or any hawkish remarks about inflation sustenance.. any or more of these could upset the markets post-RBI meet,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
Arijit Malakar, Head of Research - Retail, Ashika Group expects a revision in inflation estimates which may hit market sentiment.
“As per RBI, inflation is likely to remain high on account of supply-side constraints globally. Besides, the unseasonal rains in October may have a large negative impact on food inflation in the coming months. If RBI revises its targeted inflation range upward in the meeting, it could break the upside momentum of the market,” said Malakar.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of MintGenie.
