8 mins read . 10 May 2023
In the last few months, the Indian government has diverged in many ways from the West. They continue to buy Russian oil despite the sanctions imposed by the West. India has also continued to have trade relations with Russia. One interesting area of divergence is now seen in monetary policy. A monetary policy is considered divergent if it is not in consonance with what large parts of the developed world is doing. During the global financial crisis of 2008-09, India also adopted a policy of monetary loosening. Similarly, during the COVID pandemic also India put ample liquidity in the hands of the people. However, while India also started its hawkish journey almost at the same time as the US in 2022, it has stopped rate hikes in February itself. On the other hand, the US and even UK have continued to raise the benchmark interest rates to control inflation. Why this divergence?
The US hiked rates in its March policy and again in its May policy by 25 basis points each. On the other hand, the last rate hike by the RBI was in February 2023. It is not that inflation has come under control, but the RBI has other reasons to diverge monetarily. For example, even during the COVID crisis, the RBI never cut rates as aggressively as the Fed. In fact, Fed cut rates all the way down to the range of 0.00%-0.25%. Secondly, RBI has underlined that it has larger growth challenges in India. For instance, the spike in repo rates impacted most corporates. Net margins narrowed and solvency ratios weakened, which led the FICCI to demand a slowing of rate hikes. Above all, the RBI has indicated that April 2023 was a pause and not the end of rate hikes. RBI has still kept its options open.
India’s monetary divergence looks starker since the US Fed continues to be hawkish. Despite a growth slowdown and the developing banking crisis, Jerome Powell refused to go easy on rate hikes. He has underlined that the Fed would hike rates till inflation was beaten down.
Now we come to the big issue. What are the implications of RBI monetary policy diverging from the Fed policy?
While the Fed hiked rates by 500 bps since March 2022, RBI hiked rates by 250 bps between May 2022 and February 2023 and stopped after that. What does this divergence imply?
In a sense, monetary divergence is risky. It may look brave on paper, but the practical costs can be quite high.
Content Source: RBI and US Federal Reserve
Mutual Fund
6 mins read . 13 Nov 2023
Avoid the pitfalls: why buying low NAV funds is not a strategy
Read moreDemat Account
9 mins read . 10 Nov 2023
Muhurat Trading 2023: A Guide to Auspicious Stock Market Beginnings
Read moreMutual Fund
13 mins read . 06 Nov 2023
Debt and Hybrid Funds performance for October 2023
Read moreShare Market