Tomorrow is the important RBI monetary policy decision and it is not only important due to the rate decision but also due to the trajectory ahead. Last inflation data had shown a pause and from there many food & energy prices have reduced or stabilised.
This is the toughest choice as no central bank is interested in changing or loosening the momentum of the tools being used to fight inflation. This was emphasised by some of the Federal Reserve members yesterday during the regular appearances. They also mentioned markets getting ahead of themselves as it factors peak of the rate hike and even rate cuts in 2023.
The problem with such communication is the winter and ore festival season when the next round of hikes are to be passed on. Yes, no company has communicated that it has fully passed on the cost inflation of the current and previous periods. This will push the inflation higher during Oct-Dec along with seasonality and energy price hikes.
Any indication by central banks including RBI that we are in the past period of large quantum hikes will be dangerous. The risk to the swap rates will increase and create a large quantum of volatility when the winter starts.
Even if it is communicated that central banks will be data-driven. It will be taken as dovish and lowering of the market estimated swap rates.
This does not mean that rising markets are not to be looked at but calling tops and bottoms is not a good strategy. Instead, the best way to navigate such markets will be to follow the Volatility Index.