The June 4 monetary policy said that the Reserve Bank of India (RBI) is going to stay accommodative as long as it takes to revive and sustain economic recovery. Then June 14 consumer price index (CPI) number came in at 6.3 percent and then there were minutes of the monetary policy meeting on June 18 where three members said that they are accommodative because inflation is within the tolerance band of 6 percent. However, the expectation is that it will go to 7 percent sometime in June, July and August before it tapers off. All this puts both monetary policy bond dealers and forex dealers in a bit of a tizzy.
“There has been the trade-off between growth and inflation and it is not appropriate to just focus only on the headline inflation,” said Badrinivas NC, Head of Markets and Securities Services at Citi South Asia in an interview with CNBC-TV18.
He thinks the broader monetary policy committee (MPC) as a whole is probably likely to be a little bit more cautious in the timing of the normalization.
“It is perfectly fine, in my books, to wait and watch and see how much of this pickup in inflation and the growth recovery is going to be well-entrenched. Also, it is important to see whether any growth pickup is just a COVID led bounce back or there is an underlying more entrenched growth, which is happening,” he stated.
There is still enough data to watch both on the growth and inflation side before pressing the button of normalization. The 10-year yields have been held below 6 percent by reactive interventions by the RBI.
Citi believes it will be much better if RBI shows some flexibility in managing the back-end of the yield curve.
“(This is) because at the end of the circumstances change, global markets change, US rates are at a much different level to where they were a few months back, commodity prices are higher both globally and domestically and then there is also the normalization potential that markets have to contain with,” Badrinivas NC explanied.
Citi's global view is that US Fed will start tapering from December this year and will do the first rate hike in February 2022.
"Our base case expectation is that any normalization by the Fed will factor in the implications for the broader markets globally and therefore will be done in a very non-disruptive way,” he mentioned.
Currency-wise, Citi believes that the dollar will be stronger in the coming months.
"We don’t expect INR to be under any undue pressure from the global strengthening of the dollar. Given how RBI is intervening, our near-term expectation is for the rupee to probably move towards 75 levels.”
For the full interview, watch the accompanying video.