The bond market and the Federal Reserve have been at loggerheads for much of last year, with the US central bank officials attempting to counter the market's expectations that the Fed would pivot immediately to cutting interest rates after raising them briefly.

With Dot Plots and hawkish statements that pledged to hold rates "higher for longer", the Fed attempted to preserve the sting of its tightening to bring down inflation closer to its 2% target from a four-decade high of 9.1% seen in June.

It is looking to dampen inflation expectations, and the market was diluting that effort with its pricing in of a Fed pivot. Without its higher-for-longer tautology, the Fed feared inflation expectations would translate into headline inflation remaining high.

The same script is in play in India, too, with some analysts now pricing interest rate cuts by the Monetary Policy Committee of the Reserve Bank of India later in 2023.

Has the Indian bond market been impatient and too quick to price in the next eventuality?

The RBI is at the fag end of its rate hiking cycle, and, therefore, the market is talking up and pricing in rate cuts this year. Such expectations stem from inflation undershooting the RBI's projections, and in all likelihood, even the GDP growth will fare the same way due to monetary tightening.

In contrast to the US, the market here has received a helping hand from some of the external members of the MPC to shape such expectations. Jayant Varma was emphatic that the MPC must stop rate hikes. Another member Ashima Goyal wanted the MPC to adopt a neutral stance.

On the other hand, the RBI members of the MPC, led by Governor Shaktikanta Das, have been hawkish and referring to newer goalposts to project a "higher-for-longer stance here as well.

But who would prevail?

Last week, the NSO said the CPI inflation for December slowed to 5.7% from 5.9% a month ago. The average inflation for October-December was at 6.1%, significantly below the RBI's projection of 6.6%. The same is predicted for the next three quarters for which the RBI has given its projections.

RBI Group-Think

Minutes of the December MPC statement indicated that external member Varma was concerned that growth prospects are deterring capital investment by companies. At the same meeting, RBI member on the committee, Deputy Governor Michael Patra said inflation expectations could be stalling private investment in capacity creation.

In sum, one member saw economic growth as the problem, and the other saw it differently as inflation.

In a media interview, Varma, comfortable being a dissenter in the committee, said he is not bound by the RBI's "house-view " of inflation and growth.

But the RBI house-view, which is shaped Governor Das and Deputy Governor Patra, would matter a lot for the market.

For now, the minutes indicate the RBI brass is not done with rate hikes. They see the rate hikes and inflation control from the perspective of medium-term growth rather than its immediate prospects, which is bound to be impacted by pandemic-induced base affects and global slowdown due to monetary tightening..

The RBI members will likely think of rate cuts once an inflation rate of 4.0-4.5% shows up in the central bank's models and projections. Patra, whose term was extended by a year recently, said he expects inflation to hover between 5% and 6% for the whole of 2023.

The RBI has also been talking about different goalposts at different points since the onset of the pandemic, which also offers some cues on the RBI governor's game plan.

First, he talked up the flexibility part of the flexible inflation targeting regime, allowing him to tolerate inflation rising well past the main target level of 4%. The target, at that time, appeared to shift to 6%, the upper bound of the targeting framework. This was done because post-COVID recovery was fragile, and the rise in inflation was due to supply disruptions.

The second goal post, it appeared, was to bring inflation under 6%, as it had sped to 7.8% in April due to the war in Europe. In that sense, 6% became the target. Third, after inflation came below 6% in November, the RBI started referring to its primary target of 4%, which it hopes to achieve in 2024.

How it views its goalposts would affect the interest rate stance. And fourth, the RBI is now talking about sticky core inflation.

Last week, after the release of the December CPI data, arguably to set expectations right, Das said "Arjuna's eyes" have to be kept on core inflation as it is not a comfortable number to deal with.

Core inflation has averaged 6.1% for the year so far. It has been sticky at around 6% for the last two years. This is yet another goalpost or a reference point. From the headline number of the inflation, the RBI is now focussing on some components of inflation.

It will continue to target demand to bring down core inflation and services inflation. Another question before RBI - will it be able to pivot before the Fed does. How would the currency behave if the RBI cuts rates in the milieu of weak terms of trade or weak net exports?

Whether it chooses to hike in February or April for one last time in this cycle or remain on prolonged pause, the RBI is unlikely to entertain questions about a pivot to cutting rates this year.

It may talk hawkish and keep the markets guessing on its stance. But in this uncertain world, one never knows.

The impatient market may yet have its last laugh.