High-frequency indicators have improved; global PMI readings turning around: Citibank

On Thursday, the Bank of Korea shook the world by hiking rates by 25 basis points (bps) to 0.75 percent. It's the first central bank of a developed country to do so. The governor of Bank of Korea pointed to signs of overheating, such as higher than expected inflation and rising property prices. The US Fed is also expected to begin tapering, if not at Jackson Hole, then at the September FOMC meeting. Samiran Chakraborty, chief economist at Citibank India, has written an interesting report on what should one expect from the Reserve Bank of India (RBI) in the months to come.

Consumption to drive economic revival; don't want to surprise markets with sudden rate hike: Shaktikanta Das

“I think for central bankers across the world, not just Korea, but Brazil and Russia, where people have hiked the rates already – the challenge seems to be not just on the inflation side, but a lot of central bankers are worried about some asset price inflation particularly for real estate, that is why probably, they are being more pre-emptive in doing the rate hikes,” he said.

According to him, the context is slightly different for India. “This time around, India does not need to follow the rest of the world so closely. One reason is that if you look at the spread between the 10-year US treasury and 10-year G-Sec, that is at 500 bps now. Normally, it is around 350-400 bps. So we have a lot of room to go before we have to catch up with the Fed,” he said.

Global factors at this moment are not so important from India’s own monetary normalisation process.

Also Read: Jackson Hole: Not just ‘Mecca’ for central bankers but economists world over

In terms of gross domestic product (GDP) growth, he stated, “We have a number around 22 percent or so for this quarter, which is slightly higher than what RBI's current estimate is. So in that sense you can say that there will be pressure but the fact of life is that if you look at Q2’s high-frequency indicators, they have improved but are at around 90-95 percent of pre-COVID levels, this is kind of plateauing out a bit. So we need to be a bit more watchful before we go ahead and do upward revisions to GDP growth numbers. I would probably wait for at least a quarter more.”

In the monetary policy statement, the RBI governor Shaktikanta Das said, “We want to ensure that growth revives and sustains durably before we change policy.”

When asked what will the RBI watch out for to consider that durable growth has arrived, Chakraborty replied, “Rather than focusing on the word durable, I think I will focus on the two words ‘revive’ and ‘sustain’ because these two words were inserted in the June policy meeting. Our sense is that if the word ‘revive’ means getting back to the pre-COVID level then that can happen in Q3 of this year and the way the framework is working, RBI is going to look at level versus level rather than growth rates. So they will look at different high frequency indicators and look at their level in Q3 this year versus the level in the quarter before COVID started. If those numbers are more or less matching then the first signs of normalisation can come from there.”

While sharing his expectations from RBI’s actions, he said, “In the October policy, they are likely to increase quantum of the 14-day variable reverse repo auction as also bring down the G-SAP amount for the third quarter. These two would be soft signals towards normalisation.”