As the RBI MPC meets for the June policy, Bank of America (BofA) Securities expects the RBI MPC to hike the policy repo rate by 40 bps in June and 35 bps in August on the back of inflation persisting beyond 6 percent (the upper limit of RBI's tolerance band).
"We must highlight that for the sake of standardized steps, the chances of delivering a 50+25 bps hike combination is also quite high. The key thing is that RBI MPC exits ultra-accommodation by August and takes policy repo rate to the pre-pandemic level of 5.15 percent," BofA said in its report.
However, until then, the brokerage sees the RBI MPC retaining the stance as accommodative while focusing on withdrawal of accommodation. Thereafter, as inflation continues to stay high, it expects the RBI MPC to take the policy repo rate to 5.65 percent by March 2023.
While the RBI MPC is decisively on the path of monetary policy tightening, the RBI governor in a recent media interview reassured markets of their role as the debt manager of the government and that the "RBI remains committed to ensuring a non-disruptive completion of the government borrowing program and ensuring an orderly evolution of the yield curve," noted BofA.
Moreover, BofA also sees the RBI raising the CRR by another 50 bps in the June policy after a 50 bps increase in May. It noted that this will help absorb another ₹87,000 crore from the system.
"The RBI governor has been highlighting a multi-year framework to normalize liquidity conditions, which started when he first spoke of rebalancing liquidity in October 2021. We see the RBI continuing with measures to absorb liquidity, with current liquidity hovering at ₹6.8 lakh crore (including government surplus)," the brokerage pointed out.
Inflation and Growth
RBI MPC hiked the policy repo rate by 40 bps on May 4, 2022, in an off-cycle meeting. Since then, inflationary pressures have risen further, BofA Sec now sees May CPI at 7.1 percent YoY due to a sharp increase in tomato prices.
“Over and above the measures announced by the FM to contain prices of essential items on May 22nd, the government also announced quota-based duty-free imports of crude soybean and sunflower oil, with an import limit of 20 Lakh MT, this is expected to translate into lower edible oil price with some lag. ATF price was also cut by 1.3 percent (after 10 rounds of hike) and commercial LPG price was reduced by ₹135/cylinder,” said BofA.
It also added that the ban on wheat, sugar, and iron ore exports, too, have been put in place to keep domestic prices in check. All in, this should avoid a runaway increase in inflation, it noted.
That said, the brokerage sees CPI inflation average at 6.8 percent YoY in FY23. It also expects the RBI MPC to revise its inflation forecast from 5.7 percent now to 6.5 percent for FY23. As for the GDP growth estimate, it sees FY23 real GDP growth at 7.4 percent, a shade higher than RBI's 7.2 percent forecast.
It added, "We don't expect the RBI MPC to make any changes to their growth estimate."