RBI MPC: FX, not inflation, curbing degrees of policy freedom

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Subscribe to enjoy similar stories. After the recent GDP shocker, speculation is rife regarding a “policy action" in the December monetary policy meeting. However, the global backdrop is not supportive.

Global markets are bracing for a stronger dollar, and higher cost of capital with great rotation of flows seen returning to the US, curbing monetary policy flexibility for emerging market central banks. Hence, we believe that in an increasingly volatile world, degrees of freedom for the RBI's monetary policy committee (MPC) to ease policy to support growth would be constrained more by foreign exchange (FX) movements rather than inflation. While bond markets now anticipate rate cuts “sooner rather than later", we see the reverse and would want to closely watch global volatility trends to decide on timing of monetary policy shift in India.

From an academic perspective, usually “economics trumps politics" but we believe that during Trump 2.0, it is crucial for policymakers to stay cautious. In terms of the MPC outcome due on 6 December, we align with the consensus view of no change in rates. Also Read: MPC to keep rates unchanged amid slowing growth, rising inflation The size of the hump in October CPI or consumer price index-based inflation at 6.21% was a surprise for the MPC, with the October-December average inflation tracking close to 5.5%, way above their forecast of 4.8%.