World Economy

RBI Wrong-Foots Investors Again

RBI Wrong-Foots Investors AgainRBI Wrong-Foots Investors Again

When it comes to interest rate decisions under Reserve Bank of India’s new governor, Urjit Patel, the only certainty seems to be that nothing is certain. 

Both of Patel’s policy reviews so far have wrong-footed investors, raising frustration that they are unable to get a handle on where monetary policy is headed in Asia’s third-largest economy, Reuters reported. 

Economists and market players point to a significant shift in emphasis between inflation and growth at the two meetings as the main source of confusion, compounded by Patel’s reluctance to discuss policy in public or private.

The RBI unexpectedly cut rates in October, saying it was comfortable about consumer inflation, then running at 5%, and the need to support economic growth. That raised expectations for a rate cut this month, given inflation had eased further to 4.2% and the fact that worries about the economy had increased after Prime Minister Narendra Modi’s shock move to ditch high-denomination banknotes. 

Instead, the RBI held rates on Wednesday, stunning bond investors. The benchmark 10-year bond yield hit a 7-1/2 year low last month, but went up as much as 25 basis points after the RBI announcement. 

“If you look at the October statement, you’ll see that he (Patel) had said that the focus will be on growth and not towards CPI,” said Murthy Nagarajan, head of fixed income at Quantum Mutual Fund.

 “After demonetization, when people are saying that there are concerns around growth, he has shifted and said that our focus is on CPI inflation and growth is not much of a concern. We really don’t know what it is that he has got in his mind.” 

The RBI had no immediate comment.

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