RBIs 'calibrated tightening' stance spooks the markets

The Reserve Bank of India’s Monetary Policy Committee’s (MPC’s) decision to keep the repo and reverse repo rates unchanged surprised Indian equity markets as the markets had expected a 25 bps rate hike. The change in RBI’s stance from ‘neutral’ to ‘calibrated tightening’ sent the markets in a tailspin, causing the Sensex to drop by almost 800 points at the closing bell last Friday.

The ‘calibrated tightening’ stance comes in the wake of downward revision in expectations on inflation from 4.75 per cent to 4.31 per cent for FY2018-19. “The decision of the MPC to hold rates is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent,” the RBI statement stated.

Calibrated tightening entails no rate cut for now and the future rate hikes by the RBI will be dependent on the macro data. As for the bond market, the status quo policy has resulted in bond yields dropping by 10 bps to 8.05 per cent.

The RBI’s changed policy stance stems from the expectation of benign inflation due to softening of food prices. However, the RBI is likely to keep a close watch on the crude prices and the US 10-year bond yield.