RBI’s “main hoon na policy” should cheer market: Nilesh Shah

The RBI approach is going to be gradual tapering. The RBI Governor is saying that he does not want any suddenness and is ensuring that liquidity is going to be comfortable in the system at all times. “Saying, we do not want to rock the boat, there is a journey beyond the shore let there not be any concern on liquidity.” That should make financial markets happy and in fact we have seen a slight bump up after the policy announcement?
In essence it’s a
“main hoon na policy.” RBI will manage liquidity. They will add or deduct it as the case may be. RBI will be careful in inflation and is watching it and will take corrective action on the government’s borrowing programme. GSAP may not be there but OMOs will be there.

On interest rates and yield curve intervention, when needed, they will be there. Essentially RBI is giving the message that in the last 18 months we had done a great job. Trust us we will continue to do the same going forward. That will be music to financial markets.

You think the Governor said enough to address inflation?
Half of inflation is food inflation. He did talk about a good rabi crop, thanks to water reservoir level and recovery in September. Now, monsoon is withdrawing with just 1% deficit. About 15% inflation is fuel related. Here, governor did talk about rising fuel prices and a calibrated need to reduce tax burden. Clearly, fuel inflation is not driven just by the fuel price increase but also the heavy tax burden which is sitting on that and the government does have fiscal space to offer some reduction over there.

The third thing is related to housing components. Housing components unfortunately is into HR allowances rather than actual rental yields and there you know commodity prices will not play a role. So, effectively 75% of Indian CPI inflation is not necessarily driven by commodity prices.

For a second assuming food grain is not a commodity, it is the balance 25% where all other sectors come into play. The WPI inflation, which was in double digit, did reflect inflationary pressure but when we combine WPI and CPI which is heavily in favour of food, home and fuel, then the number comes to 5.3%. Incidentally in the US also, inflation is at 5.3%. Their 10-year yield is 1.5% because of their “efficient market” and our 10-year yield is at 6.25% because of “inefficient market.”