Positive real rates are RBI's best buffer
RBI) have rarely been this comfortable when developed nations' financial markets were in turmoil. Soaring yields, rising defaults, wobbly financial markets and troubled geopolitics are all around, but few ripples are seen here.
When the Federal Reserve chairman and the European Central Bank president are still guiding for raising interest rates, RBI Governor Shaktikanta Das, when he reveals the status quo monetary policy on Thursday, can step aside while providing the central bank's customary cautionary footnote on remaining vigilant.
At the heart of monetary policy making is prices and the character of that is diverging between developed markets and the emerging markets, especially India, which tracks a consumer price index loaded with food articles.
Prices are set to rise more than the target for some more quarters, but the solace is that the RBI's target of 4% is less than 200 basis points away.
The end goal is double that for the likes of the US, which has a 2% mandate.
The flexible inflation targeting framework, born out of the crisis due to soaring inflation and 'taper-tantrum' in 2013, gives the RBI a further 2 percentage point buffer at a tolerable 6% upper band. Taper tantrum refers to Federal Reserve Chairman Ben Bernanke's first signal to suck out liquidity that caused upheaval in the financial markets.
The crisis in India was attributed to persistently high inflation and negative real interest rates that led to investors choosing real estate and gold over financial securities, depressing financial assets.
