According to the nation’s largest asset manager, SBI Funds Management Pvt. India’s central bank RBI may be underplaying inflationary risks and may have to tighten interest rates much more aggressively later, similar to the Federal Reserve.
Asset Manager’s view on RBI’s Fall like Federal Reserve
“If you don’t normalise gradually and preemptively, you may find yourself in a situation down the line where you have to slam on the brakes,” said Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Funds Management Pvt, which manages 4.6 trillion rupees ($60 billion).
The Reserve Bank of India’s RBI accommodative policy has confounded market expectations, despite inflation exceeding the 6 per cent target for two months.
SBI Funds warns that the global rout could harm Indian bonds as the central bank downplays inflation risks in the face of surging oil prices and the market braces for record government borrowing.
“If you wait for growth to be 7% before thinking of normalizing, by that time policy action may be too late” because inflation has become entrenched, according to Radhakrishnan, who prefers bonds with maturities of up to one year.
Moreover, he believes the Fed could have proceeded more gradually, as the market is now pricing in about seven rate hikes this year. “The risk of something similar is there in India, though not to that magnitude.”
Since the end of February, bond yields in India have been supported by a dovish RBI and a lack of auctions, but yields are expected to rise as the government begins its planned record 15 trillion rupees of borrowing in April.
Benchmark 10-year yields have risen only five basis points this month, compared to a 70-point increase in US yields. Treasuries in that maturity range.
“There is a big gap between what the street thinks about inflation and what the RBI is projecting,” Radhakrishnan said. “A change in stance is warranted, but will it happen given what we have heard from RBI? I think it’s unlikely.”
The next policy review by the central bank is scheduled for April 8.
In addition, he said, one possibility is that in April the stance remains the same but at least they guide for a shift in the next review,” .“That can only happen if they acknowledge the inflation risk is much higher than what they have been anticipating.”
Federal Reserve Role In Us Economy
The Federal Reserve of the United States raised its key interest rate by a quarter percentage point, taking the first decisive step toward taming the country’s runaway inflation, which has reached a 40-year high.
The US Federal Reserve has raised borrowing costs for the first time since 2018.
Since March 2020, the Fed has kept interest rates near zero as the Covid-19 pandemic has wreaked havoc on the US economy.
With the virus in retreat and prices soaring, policymakers have signalled that they are withdrawing support for the economy and forecasting six more rate hikes over the rest of 2022.
The United States has the world’s largest economy, and the Federal Reserve is the world’s largest central bank, its decisions have an impact on market behaviour all over the world.
The Fed’s decision to raise rates will also have an impact on the Reserve Bank of India’s monetary policy review at the next Monetary Policy Committee meeting, which is scheduled for April 6 to April 8.
To ensure the smooth operation of the American economy, the US central bank system performs five broad functions. These functions are identified by the Federal Reserve as follows:
-Conducting US monetary policy to promote maximum employment and stable prices;
-Promoting financial system stability and seeking to minimise and contain systemic risks through active monitoring and engagement in the United States and abroad;
-Promoting individual financial institutions’ safety and soundness and monitoring their impact on the financial system as a whole;
-Promoting consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, and the administration of consumer laws and regulations;
-Fostering safety and efficiency in the payment and settlement system through services to banks and the federal government that facilitate US-dollar transactions and payments;
Monetary Policy taken by Federal Reserve
Monetary policy refers to the Federal Reserve’s actions to influence the availability and cost of money and credit in order to promote national economic goals. The Federal Reserve is in charge of three monetary policy tools: open market operations, the discount rate, and reserve requirements.
The Board of Governors is in charge of the discount rate and reserve requirements, while the FOMC is in charge of open market operations.
The federal funds rate is the overnight interest rate at which depository institutions lend their Federal Reserve balances to other depository institutions.
Changes in the federal funds rate set off a chain reaction that affects other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit available, and, ultimately, a variety of economic variables such as employment, output, and the prices of goods and services.
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