Reserve Bank of India deputy governor Kamalesh Chandra ‘KC’ Chakrabarty is an economist by training and was a reputed commercial banker for decades before taking up his current job last year.
He has a view on all aspects of central banking, although the portfolios he handles — department of administration and personnel management, department of payment and settlement systems, human resources development, rural planning and credit department, urban banks department, among others — hardly impress the financial markets.
So when Chakrabarty said on Thursday that the RBI can take any measure any time, the markets chose to shrug it off.
“It is an online, real-time policy.... If he [governor Duvvuri Subbarao] feels action needs to be taken, it will be taken.... It is a dynamic situation and it [inter-policy action] is never ruled out,” Chakrabarty had said.
An oblivious bond market, which sent yields 20 basis points down this week, is unlikely to take Chakrabarty lightly again. The RBI on Friday increased its repo and reverse repo rates by 25 bps each to signal higher borrowing costs in an attempt to contain inflationary expectations.
While the market chose to ignore Chakrabarty, it was always serious about deputy governor Subir Gokarn, another new entrant, because he handles the all-important monetary policy department.
Since late January, Gokarn has often ruled out inter-meeting monetary measures, saying there was no crisis-like situation. So, the market mostly believed the next step from the central bank will be on April 20, when it presents its annual policy statement for 2010-11.
This seemed reasonable because the RBI had announced an increase in banks’ cash reserve ratio by a massive 75 bps at the policy review on January 29.
The market also reads into the comments of former RBI governor Chakravarti Rangarajan with a lot of reverence. This is not just because he is currently the chairman of the prime minister’s economic advisory council. His views on the RBI’s policies are believed to be more accurate.
Rangarajan was proved right when he predicted that the RBI will tighten liquidity and not rates in January as part of its exit from the ultra-loose monetary policy.
But he wasn’t to be this time around. Rangarajan said on Thursday that the RBI will again increase the cash reserve ratio and not its policy-setting reference rates. “If there is a persistence in inflation, then it [the RBI] might act first probably on liquidity and then on policy rates,” he had said, lulling the market into a belief that rate hikes were still some time away.
“The less said the better about the comments that keep coming from government officials from time to time,” said an interest rate swap trader at a primary dealership.
“Everyone has got it wrong.... Particularly the market.... How would one explain the rally in the bond prices today?” he said.
Yields on the benchmark 6.35% 2020 closed lower at 7.8257% compared with 7.8962% on Thursday.
In sympathy, the five-year overnight indexed swap rate closed at 6.78-6.81%, compared with 6.87-6.89% on Friday.
Yields are set to soar at least 20 bps by March 31 and further in April as the RBI is expected to raise interest rates again next month.
“If the RBI had not taken any action now, it would have fallen way behind the curve,” said HDFC Bank’s chief economist Abheek Barua.
“It is still a little behind the curve and so we could see another rate hike in April,” he said.
Analysts are surprised with the timing of the rate hike. “This will be a puzzle for a while. Why this weekend? What has changed significantly,” one said.
The RBI has said it has raised rates today because inflationary pressures have accentuated and have been spilling over to the wider inflationary process.
“Our assessment is that at this juncture, further policy action is warranted. Given the lags in monetary policy, it is better to respond in a timely manner, even if it is outside the scheduled policy reviews, than take stronger measures at a later stage when inflationary expectations have accentuated,” the central bank said while announcing the rate increases.
The bank said it did not hike rates in January because it felt economic recovery hadn’t fully taken hold and a premature tightening might undermine the recovery process.
The RBI obviously feels now that recovery is increasingly taking hold. It said the recent industrial production data suggest revival of private demand, which could potentially add to inflationary pressures.
Till a week ago, policymakers, including those at the RBI, were unclear on what deserved more focus — boosting growth or curbing inflation. Seven days and readings from two important pieces of data later, Mint Street is convinced that the price rise needs to be nipped and small doses of rate increases are unlikely to impede economic recovery. NW18
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