Prudent Monetary Policy; cyclicality of food inflation allows RBI to switch focus back to growth: Kaustubh Gupta

Kaustubh Gupta, Co-Head- Fixed Income, ABSL AMC, says the incoming data suggests that inflation is expected to drop significantly over the next 12 months, likely reaching around 4.45% to 4.5%. It's important to remember that in the past 18 months, much of the inflation was influenced by vegetable prices, which tend to fluctuate in cycles. This is why the new governor feels more assured that inflation, which has troubled the RBI recently, may not be a major concern anymore. This allows them to shift their focus back to promoting growth, explaining the change in tone between the two governors.

If you do a side-by-side comparison of former RBI Governor Shaktikanta Das' last speech in December and the new Governor Sanjay Malhotra's speech now in February, there is significant change in language. The way Mr Malhotra sounded about the global economy was not that enthusing, while Mr Das had flagged off inflation risk. What is your assessment?
Kaustubh Gupta: Our policy measures need to be forward-looking and the incoming data gives us a great confidence that incoming data at least for next 12 months inflation is likely to move lower very sharply, closer to four quarter to four half (4.45-4.5%).

It should be noted in mind that in the last 18 months, a large part of inflation was driven by veggies and veggies inflation move in cyclical terms and which is why the new governor got a lot more comfort and confidence that inflation which has been a problem for RBI in last 12 months may not be a big issue and they can focus back on growth which is why the change in language among the two governors.


What according to you were the key takeaways especially for your sector from the governor's speech?
Kaustubh Gupta: This policy is very prudent given that we are living in an uncertain macro backdrop. Markets got somewhat disappointed on account of keeping the stance as neutral and to some extent no incremental announcement or a promise on liquidity right away, but these are short-term moves. There are enough hints in the policy statement.

When he said that there is a flexible embedded in the framework as far as the flexible inflation target is concerned and given that next year they are expecting inflation to be 4.2%, I think if the global uncertainty is settled faster, we could see the pace of rate cuts increasing incrementally and which is why beyond the one-day, two-day move which are more on account of the market positioning I think bond yields are heading lower.