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View on US Fed rate announcement By Akhil Mittal, Senior Fund Manager, Tata Mutual Fund

Monetary Tightening – Not a race to stand first

Inflation has been a cause of sleepless nights for most central banks world-wide in recent months. Most economies are passing through different intensity of inflation (in line with their economic construct).

Western countries are facing much severe inflation whereas in India, the scare is not as bad. I think most governments and central banks are aware of growth sacrifice in order to tame inflation, and so far, taming inflation continues to remain the priority.

Having said this, there is a time lag between rate actions and impact on inflation, and sacrifice of future growth. I believe Federal Reserve and BoE are likely to tighten more aggressively, whereas for RBI, the relative magnitude would be lesser as drivers for inflation seems to be calming.

With this in mind, there is a likelihood of Central bank rate differential between India and US (Repo Rate and Fed Fund Rate) narrowing down from last decade average. But one needs to look at the cycles while deciphering conclusions herein.

The normal spread between repo rate and fed fund rate from 2000-2009 (pre QE era) used to be around 350 bps. This spread widened to around 550 bps average from 2009-2021 period (Western world extra accommodative policy period).

Going ahead, as monetary policies pass through structural shift to move towards normal Economics 1-0-1, we are more likely to see the rate difference returning to pre 2009 times.

The case of magnitude of rate hikes in front of RBI is slightly more complicated by currency considerations, where I believe India will have to be directionally in line with global central banks, while the quantum of action to be suited for our own economy.

With inflation drivers easing, I see Terminal Repo Rate in range of 6%-6.25% for now, and a longish period of pause post that. I believe growth situation in India is not as bad as in west (recessionary expectations rising in the west) and RBI might not be immediately pushed to support growth.

While maintaining inflation within reasonable range to ensure medium-term growth; financial stability likely becomes more important and Central banks would want to avoid policy uncertainty.

So, in this race of Monetary tightening, RBI most likely won’t be competing to top the charts !!

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