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Going Wrong 🙅‍♂️

For several weeks, our bet was that the RBI would hike rates in April. And, it didn’t! But despite that, our view of the markets hasn’t changed.

Why did we think rate hikes were coming?

  • Despite six consecutive hikes, inflation is still above the comfort range of 6%

  • There are several factors, which can push inflation higher, especially food inflation. There is a shortage of eggs, and milk, and a heatwave can hamper some of that rabi yield

  • RBI had room to hike rates and prioritise curbing inflation. After all, with expectations of 6-6.5% growth for FY24, India’s growth still beats the world. And, we don’t face risks of a banking crisis if more hikes come by

Why did RBI not hike rates?

  • There has been a general concern about financial stability. You don’t want India to end up like the West, where aggressive hikes can result in a potentially hazardous impact on the economy

  • Monetary policy measures have been on since May 2022, and the RBI reckons these are still working through the system. The impact of the total effective hike of 290 bps needs some assessment, which deems a pause on hikes

Why has our stance not changed?

  • The RBI’s decision to pause was only for the April meeting. While its focus remains on the withdrawal of accommodation, the MPC is open to taking further action in the future. Future rate hikes are possible.

  • We still think there are risks to continued inflation worries. Supply factors causing food inflation aren’t resolved, the OPEC and its allies agreed to curb production, and China’s rise isn’t likely to keep global raw material prices under check

In short, despite the pause for April, we still don’t think we’ve turned the corner. Our views on asset classes remain the same - negative on equities, slowly thinking of upping the duration of debt, go to gold for safety, and playing the contra-China story!

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