scorecardresearchRBI MPC analysis: Economy to remain stable, inflation to come down below

RBI MPC analysis: Economy to remain stable, inflation to come down below 6% in Q4; top 10 analysts share their views

Updated: 30 Sep 2022, 12:00 PM IST

  • After the 50 bps repo rate hike, the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the Bank Rate to 6.15%.

Das expressed his faith in the resilience of the Indian economy.

Das expressed his faith in the resilience of the Indian economy.

There was no negative surprise for the markets in the September Monetary Policy Committee (MPC) outcome. The Reserve Bank of India raised the repo rate by 50 basis points to 5.9% with immediate effect.

After the 50 bps repo rate hike, the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the Bank Rate to 6.15%.

As the Reserve Bank of India (RBI) Governor Shaktikanta Das said, the MPC decided by a majority of five out of six members to remain focused on 'withdrawal of accommodation' to ensure that inflation remains within the target going forward, while supporting growth.

Das expressed his faith in the resilience of the Indian economy. Even though the real GDP growth in Q1FY23 (at 13.5% year-on-year) turned was lower than the RBI estimates, Das said economic activity in India remains stable despite the challenging global environment.

"The late recovery in Kharif sowing, the comfortable reservoir levels, improvement in capacity utilisation, buoyant bank credit expansion and government’s continued thrust on capital expenditure are expected to support aggregate demand and output in the second half of FY23 (H2FY23)," said Das.

RBI projected real GDP growth for FY23 at 7% with Q2 at 6.3%, Q3 at 4.6%, and Q4 at 4.6%, with risks broadly balanced. The growth for Q1FY24 is projected at 7.2%.

RBI expects retail inflation to come down to 5% in the first quarter of the next financial year (FY24). In the current financial year (FY23), retail inflation may remain above the RBI tolerance rate of 6.7%.

"The inflation projection is retained at 6.7% in FY23, with Q2 at 7.1%, Q3 at 6.5% and Q4 at 5.8% with risks evenly balanced. CPI inflation is projected to further reduce to 5% in Q1FY24," said Das.

Market barometer Sensex jumped nearly 550 points while the Nifty topped 16,950 after the MPC announcements. The currency and bond market also saw action as the rupee rose nearly 40 paise and the the10-year bond yield climbed 0.30%. 

Analysts are of the view that the RBI MPC announcements were in line with expectations and some believe that the central bank may take a pause on the rate hikes after the Q4FY23 when inflation cools down.

Analyst: Amar Ambani, Head - Institutional Equities, YES SECURITIES

RBI’s MPC expectedly voted for a 50bps hike, replicating the endeavour of global central banks to protect their currencies from prevalent volatility.

The central bank remains confident of demand remaining supported during H2, thanks to stable private consumption, while rural demand is also picking up.

On the future interest rate moves, though RBI’s stance is more driven by domestic factors, the current landscape of aggressive rate hikes by the Fed and ensuing rupee weakness will compel RBI to closely follow the interest rate moves in the US. RBI will likely raise the repo rate by 35bps in September.

Analyst: Prasenjit Basu, Chief Economist, ICICI Securities

"The RBI’s MPC raised its policy repo rate by 50bp to 5.9% as we were expecting. We expect a further increase of 25bp at the December MPC meeting, by which time CPI inflation will likely moderate to 6% year-on-year (YoY) as the strong Kharif crop is harvested," said Basu.

Once real interest rates are positive, the MPC can pause its rate hikes. The RBI too believes that CPI inflation will average 6%YoY in H2FY23.

"The current account deficit widened to 2.8% of GDP in Q1FY23, but India’s external debt declined US$617bn (19.4% of GDP) in June 2022. We expect the BoP current account deficit to widen to 3.3% of GDP in Q2FY23, but to then moderate to 1.6% of GDP in H2FY23 as crude oil prices recede," said Basu.

Analyst: Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

"Repo policy rate hike of 50bps is in line with our expectations. Given the global adverse conditions, we remain wary of the pressure on the rupee and hence the need for continued rate hikes. We expect the MPC to hike 35bps in the December policy. However, with inflation expected to fall within the 6% threshold in Q4FY23, we expect the MPC to probably pause and assess the lagged impact of monetary tightening," said Bhardwaj.

Analyst: Madhavi Arora, Lead Economist, Emkay Global Financial Services

The MPC delivered a 50bps hike in line with expectations. Clearly, the fast-evolving world order and consistent repricing of the Fed’s outsized hikes are strong-arming the emerging markets (EMs).

This painful adjustment has not spared the RBI either, which realised the net cost of supposed soft signalling via shallow hike could be higher than a larger hike of 50bps.

This exposes the instability inherent in the classic EM central bank trilemma: one cannot have a stable currency, unfettered capital flows, and independent monetary policy all at the same time.

This conscious front-loading could give them some breather next year on shallow hikes ahead. With inflation likely to be largely in line with RBI’s estimates, this week’s 50bps hike will make the ex-post forward real repo rate positive, albeit still lower than the RBI’s estimated real neutral rate of 0.8-1%.

"At this point, we still think that the RBI would not go too restrictive and terminal rate could hover near the estimated real rates, implying not more than 100bps hikes ahead, including today’s decision. However, the extent of global disruption will remain key to the RBI’s reaction function ahead,” said Arora.

Analyst: Ritika Chhabra, Economist and Quant Analyst, Prabhudas Lilladher

“The outcome of the MPC meeting is on expected lines as RBI raised the repo rate by 50bps. The central bank gave very balanced guidance emphasizing continuing resilient domestic economic growth with risks being rising instability in the global economic and financial environment. Overall the markets have reacted positively to the policy announcement,” said Chhabra.

Analyst: Santosh Meena, Head of Research, Swastika Investmart

The 50 Bps rate hike by the RBI in today’s meeting was in-line with the expectations. The key highlights were the resilience shown by the Indian economy considering the turbulent global environment and concerns emanating from global growth slowdown and hawkish stances of various central banks.

Inflation is witnessing a downward trajectory, nonetheless, the reduction in GDP growth forecasts was one of the letdowns in the overall commentary.

Analyst: Ajit Kabi, Banking Analyst at LKP Securities

The 50bps hike in the policy rate to 5.9% was expected. However, the inflation estimates were the key monitorable. The inflation was expected to be at 6% for the second half of the financial year and GDP growth is expected to be at 7% for the entire fiscal.

"Factoring in the daunting challenge of inflation, the repo hike is likely to be a welcome move. The rate hike was earlier anticipated and expected to be in the indices price," said Kabi.

Analyst: V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services

"The dominant theme in economic and market discussions these days is India’s resilience and outperformance in a weakening global economy and bearish equity markets. The RBI governor’s comments today is a reaffirmation of this ‘India resilient’ theme," Vijayakumar pointed out.

"It was this positive commentary on India’s growth impulses and projection of 7% GDP growth with 6.7% inflation for FY 23 that has come as a positive even while the policy announcements relating to rates were on totally expected lines. The Governor's confident statement that CAD can be financed comfortably even with crude at $100 for the rest of the year is reassuring. In brief, the positive commentary is market positive," said Vijayakumar.

Analyst: Anu Aggarwal, President & Head of Corporate Banking, Kotak Mahindra Bank

The 50 basis points (bps) hike in policy rates has been in line with market expectations. The current stand by the Reserve Bank of India (RBI) is partly driven by the US Federal Reserve which is going aggressive in order to bring down inflation.

"RBI had to do this instead of a 30-35 bps to control rupee depreciation and therefore imported inflation. Meanwhile, the rise in rates will slow down capex plans of corporate India which were just about kicking off," said Aggarwal.

Analyst: Sameer Kaul – MD & CEO, TrustPlutus Wealth

Indian central bank raised repo rates by 50 bps along expected lines. As the governor has noted, the global economy is in turmoil and India needs to be watchful both on the external account as well as in terms of the domestic fiscal situation. "We expect the RBI to remain prudent in terms of balancing between growth and inflation," said Kaul.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.

We explain here why does RBI change repo rate
First Published: 30 Sep 2022, 12:00 PM IST