Timing Is Everything

For the recent monetary policy review, the markets had discounted a rate hike. The only thing that everyone thought would matter would be the vital 25 basis points – ­between the absolute consensus of a 25 basis points hike and the pessimistic expectations of 50 basis points. To the utter surprise of all, the RBI left the interest rates untouched in its mid-quarter policy review. In its statement read out by Dr Rajan, who is as genial as he is astute, the RBI expressed that, “while CPI and WPI inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level CPI inflation excluding food and fuel leaves no room for complacency. There is, however, reason to wait before determining the course of monetary policy”.

We have made this simple point many times in the past – the point about the inefficacy of interest rates in containing inflationary pressures. The two previous hikes effected in the recent past have not been able to achieve what they were supposed to. A third one in a row would surely have turned out to be as ineffectual. Controlling inflation is not the sole prerogative of the RBI, but the way things have been, it looks like the RBI has made this its mission statement. In the euphoria of the interest rates being held unchanged, the shift in the thought process of Dr Rajan (or rather the RBI) from the earlier stance of inflation-obsessedness seems to have been lost on many.

But the developments that happened overnight are proving to be even more interesting. The Fed has called for partial tapering of its bond buying exercise, and what’s interesting is that the quantum of taper is far too miniscule to have an immediate impact on the markets. Globally, the markets have responded quite well to the Fed’s overtures.

As far as the Indian markets are concerned, they slid down after a gap-up opening, and are currently trading almost a percent below yesterday’s closing levels. But that should not be too much of a worry, for Dr Rajan has made sure in advance that the markets are not thrown into a tizzy. It must be said that the changed stance of the RBI on inflation and its impact on the economy has come at the right moment. The sense of timing that Dr Rajan has is enviable indeed. In fact, his actions and their consequences have both become fairly predictable of late.

Last time around, the RBI governor tailed the Fed. Breaking away from tradition, he postponed the RBI’s policy meet in the month of September to hold it a couple of days after the FOMC meet. That turned out to be a smart move indeed. With the Fed having put its ideas of a taper on hold then, Rajan took full advantage of the environment to hike the rates.

This time, he went ahead of the Fed’s announcement and maintained status quo on the rates. That actually makes you stop ad wonder whether he was aware of the Fed’s moves beforehand. Knowing fully well that the markets could be disgruntled by a double whammy of an interest rate hike at home and a tapering announcement by the Fed (no matter how large or small), the governor probably thought it prudent to hold the interest rates at the current levels.

It is important to listen to these subtle noises to get an upper edge in the market. Once the ruckus over tapering subsides, inflation and its worries will no doubt take centrestage once again. Until then, there is a buffer of time that you could utilise to learn a thing or two about how to time the market as Dr Rajan times his monetary policy moves.