While the recent action on rate front by the RBI is a welcome step indeed, its effect had already been priced in by the markets and thus a real impact remains absent on either yields or exchange rate front just as the needle moves forward on two aspects; the timing and quantum of the next rate action. On that front, we are of the limited opinion that the peculiar situation, where the world itself is caught in a tailspin but EMs would remain at the receiving end more than their DM counterparts, necessitates a shift in strategy; widening the interest rate corridor, a larger rate hike sooner than later (at best, akin to committing a Type-I error) co-terminus with other measures that ensure the return of semblance of order.  

RBI’s Report on Currency and Finance (2020-21) clearly mentions that, “As the marginal standing facility and the fixed rate reverse repo windows are essentially instruments of liquidity management, they are in the remit of the Reserve Bank. In its endeavor to achieve the policy rate voted upon by the MPC, decisions involving a change in the reverse repo rate and the MSF rate and announcements thereof may be shifted out of the MPC resolution to the Reserve Bank’s Statement on Developmental and Regulatory Policies.’ 

Also, the needle of market narratives are moving tightly with exchange rate management (as much as inflationary expectations management) and NDF markets are reflecting the current mayhem most as shorter end of the curve is vaulting through the roof, the annualized cost at times double that of longer end, with action concentrating around 1-3M.

The toolkit needs to be fine tuned where exporters need to increasingly and optimally match the proceeds and remittances with importers’ needs and hedging patterns, any undue, purposeful delay attracting some punitive deterrence mechanism as markets are closely watching the developments on exchange rate, and its implications against Mint Street’s interventions. The generous time lines allowed for bringing export proceeds (say 15M) can not be a carte blanche scheme for all. The time line may be reduced to 6 months as a norm, with extensions exceptions on case-to-case basis.

Last, the Government also needs to support the RBI in its quest. There is a serious need to relook at enhancing flows of patient capital in debt, as also equities tweaking the tax and capital gains structure suitably as the fight for capital is just getting murkier globally and non-AI heavyweights put us on the wrong end of the see-saw. 

Finally, let the RBI take a prudent call on the extent of rate hikes in the current cycle. While the consensus in the market is a shallow rate hike cycle, its the prerogative of the RBI to decide on the extent, quantum and duration of rate hikes. We continue to believe a larger rate hike in December policy as growth will continue to be strong and top 7.5% again.  

In uncertain times, a good central bank should be systematic enough to preserve credibility, flexible enough to adapt, and transparent enough that uncertainty about the economy does not become uncertainty about the central bank itself. This is exactly what was also conveyed by RBI Governor very recently in his Princeton address.