RBI signals interest rate intent with focus beyond Arjuna's eye
What did the RBI say on inflation?
The RBI said the recent rise in inflation has primarily come from unpredictable food shocks.
The central bank hopes the rise in inflation will be a transitory phenomenon and said their period of stay was unpredictable.
It hopes inflation will soften as supplies improve.
That’s the equivalent of saying, “Trust in God, but tie your camel.”
Inflation target raised
The RBI raised the inflation forecast for FY24 to 5.4% from 5.1% due to the rise in prices of pulses and cereals, even as vegetable prices are expected to come down.
What has to be borne in mind here is that this revision comes after the RBI had, in June, lowered its FY24 inflation forecast to 5.1% from 5.4%.
The situation on food prices continues to be uncertain, and RBI's concern about inflation can be gauged from what Governor Shaktikanta said in the monetary policy statement.
Das said uncertainties remain on the outlook for domestic food prices due to sudden weather events and possible El Nino conditions.
To know how El Nino could impact India and your portfolio, read our earlier blog https://www.bondbazaar.com/blogs/el-nino-could-impact-india-how-protect-your-investments.
Rates not up, but liquidity drained
The RBI might not have raised interest rates, but that does not mean it will permit liquidity to slosh around.
The banking system saw a rise in liquidity due to the RBI’s move to withdraw Rs 2,000 notes from the system.
The central bank’s intervention in the forex market by buying dollars to check the dollar from appreciating too much also led to a rise in liquidity.
To absorb this liquidity, the RBI has asked banks to maintain an additional 10% Cash Reserve Ratio (CRR) on deposits raised between May 19 and July 28.
What does RBI mean by Arjuna’s eye?
The current CRR hike is a temporary measure and will be reviewed by the RBI on September 8.
This statement is not providing comfort to the market because Das also said the RBI has to go beyond keeping Arjuna’s eye to deploying policy instruments, if necessary, to contain inflation.
Arjuna’s eye, for the RBI, is the 4% inflation target.
So when the RBI signals it will not hesitate to go beyond, it is merely underscoring the central bank’s larger mandate of ensuring financial stability.
The RBI appears not to have taken a benign view of some lenders offering home loans at aggressive rates and decided to drain the surplus liquidity enabling lower rates.
So RBI has signalled where interest rates will stay.
High for now, higher if warranted.
Should you invest in fixed-income right now?
Seize the moment and invest to capitalize on the prevailing rates.
Predicting the peak or trough of the interest rate cycle is akin to forecasting the stock market's movements.
Although the RBI has indicated no immediate rate hikes, it hasn't ruled out future increases either.
Why attempt to decipher the RBI's intentions?
It is wise to secure your investments at these rates and ensure guaranteed higher returns.
Observing the cyclical nature of interest rates, they seem more likely to fall.
Allocating funds to debt investments during this phase of the interest rate cycle could promise consistent, elevated returns throughout its duration.
Crucially, it safeguards your initial investment.
Consult a SEBI-registered investment advisor to help choose the investment appropriate for your risk profile.
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