Global brokerage firm BofA Securities believes the 50bp repo rate hike by the RBI and focus on withdrawal of accommodation is a 'dynamic and pragmatic' move in these uncertain times.
The brokerage firm highlighted that the RBI governor refrained from giving any forward guidance and chose to be pragmatic and dynamic.
BofA sees calibrated rate moves by the RBI MPC going ahead.
"We expect a 25bp hike on August 4, taking the policy repo rate to pre pandemic level of 5.15 percent. Thereafter the RBI MPC is expected to turn to calibrated tightening and deliver two more hikes of 25bp each in FY23, taking the repo rate to 5.65 percent by March 2023," said BofA Securities.
The brokerage firm said a wide divergence versus RBI's inflation projections is a risk that could potentially lead to a steeper rate hike.
"The MPC could opt for another 50bps move if the May and Jun inflation prints are substantially higher than our current expectations of 7.1 percent and 6.7 percent respectively. We also expect the RBI to announce measures to ensure orderly completion of the government borrowing program as the situation evolves, such as operation twist," said the brokerage firm.
The Reserve Bank of India (RBI) raised the repo rate by 50 bps to 4.90 percent on June 8 with immediate effect and kept the stance 'withdrawal' from 'accommodative' to ensure that inflation remains under control.
Standing Deposit Facility (SFD) and Marginal Standing Facility (MSF) rates were also raised by 50 basis points to 4.65 percent, and 5.15 percent, respectively.
The RBI decided to stay put on Cash Reserve Ratio (CRR) while emphasising normalizing the pandemic related extraordinary liquidity accommodation over a multi-year time frame.
The governor also clarified that this rebalancing process began in 2021, so we are already in the second year of this move and that the RBI does not want to take any abrupt/rushed action.
BofA Securities pointed out that another interesting clarification was around RBI's commitment to move towards normal monetary conditions in a calibrated manner, whereby 'normal' was referred to overnight call money rate trading closer to the policy repo rate, which is currently closer to the floor of the corridor or the SDF. This is in line with RBI's revised liquidity framework that was laid out in Feb 2020.
Bringing down inflation and anchoring inflationary expectations was at the core of MPC's decision to hike rates on June 8.
"The RBI MPC revised up their FY23 average CPI inflation forecast to 6.7 percent year-on-year (YoY). BofA estimate for FY23 inflation is 6.8 percent YoY. 75 percent of this increase in RBI's projection (100bp up against Apr'22) was attributed to food, which the governor acknowledged, emanated mostly from the war led external factors," BofA Securities pointed out.
"His statement once again called out the supply shocks at play, driving up inflation. This inflation forecast revision leaves little room for the RBI to get surprised by actual outcomes and paves way for calibrated, standard rate actions going forward. On the growth front, real GDP growth estimate was retained at 7.2 percent YoY for FY23, a shade lower than our 7.4 percent YoY forecast," said the brokerage firm.
Disclaimer: The views and recommendations made above are those of the brokerage firm and not of MintGenie.