RBI joins other Central banks to dislodge market complacency

Contrary to the market expectations, RBI not only refrained from giving any forward guidance on their future actions but also kept the doors open for a potential rate hike. With this, RBI has joined the global central bankers club by deliberating upon the level of underlying uncertainty about making forward predictions.

Structurally, the rational expectations sentiment of the markets, which factors in perfect information between the central bank and economic agents, is seen to be counterproductive and ineffective. The recent Fed chair Jerome Powell’s interview also talked about it and so has the RBI as it believes that leaving room for adaptive expectations, that accommodate progressive adjustments to uncertainties, may improve the efficacy of monetary policy actions.

On the inflation front, core inflation continues to remain a cause of concern not just for the RBI but for the global central bankers. In their recent monetary policy meeting, the Fed and the ECB have conveyed their uneasiness with the sticky and elevated core inflation.

Even though the headline inflation for India has been trending below the RBI’s upper tolerance band since November 2022, visibility of any signs of disinflation in core evades. Also, given the seasonal nature of the decline in food inflation, led by a contraction in vegetable prices, we believe that once this seasonal impact wanes off, the headline inflation would not have a supportive tailwind.