RBI monetary policy reaction: Sandeep Yadav, Head-Fixed Income, DSP Mutual Fund

8 Aug 2024 , 01:21 PM

Central banks are not speculators. They are insurers. We repeat this statement we made last year.

We stated this last year (2023) when markets expected US CPI to fall and FED to do multiple rate cuts. At that time Powell mentioned risks of early rate cuts were far more than delayed rate cuts. If fed cut early and inflation rose, the damage to economy would be far worse than if fed cut late and growth fell. And how correct was FED, as inflation took about a year to fall closer to projected levels.

Todays’ RBI policy is in the same vein. If RBI were to sound dovish today, and inflation (or global yields) were to rise thereafter, then RBI would have played all its cards too soon.

The base case expectation is that the inflation and growth would come down globally, and in India. However, RBI needs to be aware of what-if scenario. What-if inflation and growth do not come mimicking US in 2023?

Sometimes Central bankers’ job may seem thankless. If growth indeed falls along with inflation, then a 20/20 hindsight would show that RBI has made a mistake today. However, it is more prudent for RBI to hedge against tail risks of higher inflation.

However, unlike central banks, we need to speculate to generate returns for our investors. We expect these tail risks of higher inflation to vanish in coming weeks. We expect most central bankers to be dovish – and we expect RBI will be too. We remain long on bonds.