Even as bond markets anticipate a lower inflation figure, the uncertainty over monetary policy persists. The central bank has indicated that markets need to be prepared for changes as global markets are in a state of flux.

In a meeting with bond and foreign exchange dealers this week, RBI governor YV Reddy is understood to have highlighted a point that there is no concrete six-month horizon, as the global markets are in a state of flux. Sources said the governor also asked bankers to be prepared for a change. He pointed out that internationally central banks were removing the accommodative stance in their policy.

Mr Reddy’s comments are likely to increase uncertainty in the markets over the stance likely to be taken by the governor in his monetary policy later this month. Although a section of the market believes that nothing has changed in the macro-economic scene to prompt the governor to revisit rates, there are others who feel that RBI is behind the curve in its rate hikes and may have to tighten once more to pre-empt inflation.

At the same time, it is widely expected that headline inflation will be down significantly on account of the high base effect, which, in turn, will reduce pressure on rates. Sources said that the governor told bankers that they should consider all factors affecting the macro-economy before taking a view. He also pointed out that all Asian countries are
currently facing a task of tackling huge capital flows.

While pro-growth advocates in the industry have been calling for a soft interest rate regime on grounds that growth is sacrosanct for a developing country, the governor is understood to have pointed out that India is still an emerging market and the policy framework would be akin to an emerging market.

Since RBI tightened monetary policy, the latest major economy to tighten rates was China. The Chinese authorities, last week, announced a hike in reserve requirement ratio for banks by 50 basis points effective April 16. Following this, China’s reserve ratio will go up to 10.5% for most banks and 11% for weaker financial institutions.

Incidentally, China has raised its reserve requirements six times in less than 10 months against three times that RBI has revisited CRR. Besides inflation figures, markets are waiting for the response to a bond auction to be conducted by RBI on Wednesday. Although the liquidity position has eased, dealers do not expect any major rally because of the uncertainty.

Source:ET