Covid Resurgence Will Force to Keep The RBI Monetary Tap Open, Glogal Bond Markets Shown

RBI Monetary Policy & Global Bond Markets

1. The RBI monetary after the pandemic had curtailed the freedom of many central banks to play with the interest rates for a while. With the increasing option of lower interest rates that were needed last year, the accommodative policy might now be coming to an end.
2. This would mean that the central banks around the world would surely have their work cut out. But is it? The answer is much more shades than plain black and white.
3. It is to be noted that the pandemic had been receding across the globe, leading to lower cases.
4. But just when the monetary authorities were emphatically and effectively preparing the ground for a reversal of their ultra-loose policies that were earlier adopted in response to the coronavirus crisis, it clearly seems that such an option won’t be viable for some time now.
5. From bracing for interest rates in major economies to head northward sooner than later, global bond markets on Thursday took a 360-degree turn.
6. But what circumstances compel the banks to derail their plan to tackle inflation? The discovery of a new potentially dangerous and deadly variant of the coronavirus in South Africa, Hong Kong, and Hong Kong has sent the world order into a frenzy all over again.
7. This has been coupled with the resurgence of cases in the western world, especially in Europe. This has emphatically led to the restrictions that have been placed on the economies and world travel which will have its consequences in the long run as the risk to global growth has intensified.
8. This claim can be corroborated by the price action in the global bond markets. It is well known that decision-making in the market is laced with indecision, irrationality, and whims.
9. This has been recently shown in the market as instead of getting ready for imminent policy normalization, as should be expected of the market, the bond markets seemed to be expressing the jubilant and exuberant view that the monetary accommodation would stay for a while longer.
10. Thus, one can quite clearly state that the investors are actually betting on the central bank’s accommodative, helping policies, to usher them out of the state of crippled finances.

But what does all this narrative mean for India? It is to be noted, that according to the reports, the Indian sovereign bonds have been enjoying the yield on the 10-year benchmark of 6.10 percent.

This perhaps is due to more palpable reasons that prior to the odious detection of the fresh variant in South Africa, the market was holding a stronger view of the bank’s interest policy and was emphatically anticipating the process of raising interest rates.

This was being anticipated in its next policy statement, which would have been achieved by raising the reverse repo rate. Therefore, this would have led to the narrowing of the width of the liquidity adjustment facility corridor.

Though, it is worth noting here that the central bank has already paved the way for this step. This is due to the fact that the quantum of funds has been withdrawn and the cutoff rates have been set at a variable rate.

But even though through all market actions, the money markets may have aligned to the new expectation of the reverse repo rate, the actual act of raising the reverse repo rate would itself have significant implications.

This would namely be the ultra-loose accommodation being reversed. This is merely due to the fact5 that the banks have the credibility factor and one would hardly expect that the central bank will actually reverse its stance.

This fact spe3cially garners more importance due to the fact that the bank has officially started the process of lifting interest rates.

But given the strong proposition above, is there no other narrative that is prevailing in the market? The answer is apparently no.

The other narrative that is floating in the market is that given that India is still a nascent economy, that is recovering and is facing a threat of a new variant, it is quite a possibility that Governor Shaktikanta Das will indefinitely keep all rates on hold.

This can also be anticipated as the central bank might choose to evaluate the global situation to obtain more clarity on the spillovers for India before it makes a major policy change.

Though, if the issue is to be scrutinized through an affirmative lens, one can state that India will bear the salutary impact of the new risk to global growth by a decline in international crude oil prices that has been pestering the p[public for quite some time now.

Even though, as has been witnessed, the government has reduced excise duty on major petroleum products, it cannot be forgotten that over the last couple of months a significant risk to inflation has emerged as the outlook on the trade deficit is widening.

Thus, it can be effectively argued that the scales are perfectly balanced for the central banks as there is almost a consensus that the reverse repo will be hiked, as the market rates had aligned perfectly to a higher rate.

But given the recent circumstances, one can add that RBI can still maintain the status quo due to changing dynamics of world affairs and trade.

Even though some might argue that the agenda for hardening the inflation has taken a backseat, for now, one can never be sure in which option’s favor will the tables turn.

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