*****Will the market understand Shaktikanta Das’ motivations and trust him again? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/view-will-the-market-understand-shaktikanta-das-motivations-and-trust-him-again/articleshow/91325002.cms

Synopsis

So, what changed? A congeries of thoughts linked to the economy as well as political economy could have prodded him to take the plunge. Das probably sensed that the time to take tough actions was fast running out. Someone who knows the minds of politicians and understands their priorities, Das may have realised that the next 10 months is the only window he has to tighten rates and impact the markets before the general elections of 2024.

What does Shaktikanta Das know that we don’t? The RBI governor, who had meticulously positioned himself as a Dove with a capital ‘D’, chose a scorching summer afternoon in the middle of trading hours, amid a falling market and a stock sale by the government in the most prestigious state-owned company underway, to finally pull the trigger.

Das went on air to announce on Wednesday what he could have done a month – or several months – ago, or even a month later. But the

central bank

baffled everyone with its timing by going ahead with a sharp hike in key policy rates (by as much as 40 basis points, bps), and mopping up liquidity from the money market by increasing the cash that banks have to maintain as reserve by 50 bps. By any monetary policy yardstick of any country, these are stiff doses. They were applied after an unscheduled, hush- hush meeting of the Monetary Policy Committee (MPC) this week.

No one can blame a central bank for raising interest rates in the face of spiralling inflation. Indeed, the bond market – which constitutes the largest constituency of Das, deciphering every word he says or could have said – has been signalling to the bureaucrat-turned-central banker for nine months that rates must go up. But Das somehow ended up painting a different picture by sprinkling almost every speech with magic words like ‘accommodative’, ‘calibrated’ and a focus on ‘growth’, while his deputy presented theoretical frameworks to justify the actions (or inactions) after every monetary policy statement by the governor.

The markets and the media alike came back from every briefing steeped in the belief that RBI will remain ‘soft’ on rates as long as it can, and that shifts in policy gears towards rate hikes and a hawkish regime would be orderly, timely and bereft of surprises and shocks.

So, what changed? A congeries of thoughts linked to the economy as well as political economy could have prodded him to take the plunge. Das probably sensed that the time to take tough actions was fast running out. Someone who knows the minds of politicians and understands their priorities, Das may have realised that the next 10 months is the only window he has to tighten rates and impact the markets before the general elections of 2024.

It was time to also send a reassuring message to an army of small, faceless savers who have been battling a negative real return for the past few years. Savers far outstrip the number of borrowers in an economy, and the biggest beneficiaries of low interest rates over a long time have been top-rated corporates, who after gaining from a lower tax, have continuously lowered their fund cost through refinancing.

If policy rates are held steady next year and small savings rates – which were cut a day after the Uttar Pradesh poll results – are raised a little, Wednesday’s actions would be a distant memory by mid-2024.

Das, having admirably guided the markets during the worst phase of the pandemic, would not want to be remembered as a governor who was ‘behind the curve’. And with the world widely betting on a hawkish US Fed, why wait till the next meeting of the monetary policy panel in June to announce a rate hike? The March inflation number was worse than what economists had forecast, and April could be spooky. So, why follow the Fed, and betray the compulsions of a central bank trying to support the currency amid capital outflow? So, why not raise the rates now?

To sync with a dovish story and avoid ‘rate hike’ making the headlines, RBI had been indulging in stealth hikes since last year – introducing new terms and windows to soak up liquidity by promising higher rates to banks. Plain, multiple rate hikes in smaller measures, instead of a smoke-and-mirror rate strategy, could have spared the market from Wednesday’s shocks.

The bureaucrat in Das, perhaps, makes him act like a firefighter who leaps from one fire to another. ‘Growth’ was all that worried him so far. The next big scare is ‘inflation’. His bet: the transition can never be smooth, or as promised, in today’s chaotic world, and the market would understand him. But will it?

The sudden policy actions may have weakened the bonds with the financial markets that the governor had slowly built since the Covid lockdown of 2020. Just as taming inflation, regaining that trust would take a lot of Das’ time and energy.

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