The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) decided to increase the policy repo rate by 35 basis points to 6.25 percent on December 7.
The standing deposit facility (SDF) rate stands adjusted to 6 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 percent.
The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
RBI Governor Shaktikanta Das said real GDP growth for 2022-23 is projected at 6.8 percent, with Q3 at 4.4 percent and Q4 at 4.2 percent. Real GDP growth is projected at 7.1 percent for Q1FY24 and at 5.9 percent for Q2.
"Even after this revision in our growth projection for 2022-23, India will still be among the fastest-growing major economies in the world," said Das.
RBI expects food inflation to moderate with the usual winter softening and the likelihood of a bountiful rabi harvest, but pressure points remain in the form of prices of cereals, milk and spices in the near term.
"Taking into account these factors and assuming an average crude oil price (Indian basket) of $100 per barrel, headline inflation is projected at 6.7 percent in FY23, with Q3 at 6.6 percent and Q4 at 5.9 percent. CPI inflation for Q1FY24 is projected at 5 percent and for Q2 at 5.4 percent, on the assumption of a normal monsoon," said RBI Governor.
Let's take a look at what top analysts have to say about the RBI MPC outcome:
Analyst: Prasenjit Basu, Chief Economist, ICICI Securities
"We do not view this as evidence of any intent to further tighten policy in subsequent MPC meetings, but merely as an acknowledgement of the persistence of excess liquidity currently—which the RBI will drain daily, as it has for the past nine months," said Basu.
The smaller rate hike will be passed through to depositors and borrowers quite quickly this week but the good news (in our view) is that further rate hikes are unlikely.
"Fuel inflation will ease unless there are unexpected surprises from the west-imposed cap on Russian seaborne oil exports, and the good kharif harvest should allow food inflation to moderate as well," said Basu.
Analyst: Dharmakirti Joshi, Chief Economist, CRISIL
The expected moderation in the pace of tightening happened. It stems from rising external risks to growth and reduced upside risks to inflation because of a material fall in crude oil prices.
As the RBI Governor has highlighted, the inflation battle is far from over because the sticky core continues to put pressure on the headline. Today’s rate hike was to break that core-inflation persistence.
Between now and the next policy, RBI will closely monitor the impact of its previous rate hikes on domestic demand and core inflation, as well as the actions of systemically important central banks such as the US Federal Reserve. That said, expect the RBI to strike if elevated inflation prolongs.
Analyst: Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services
In an expected move, policy interest rates are raised by 35bps today, taking the repo rate to 6.25 percent and SDF to 6 percent. Further, the governor made it clear that the fight against inflation will continue, while India's growth remains more resilient. It is, thus, clear that there will be at least one more rate hike of 25bp in CY23.
Analyst: Amar Ambani, Group President & Head - Institutional Equities Head, YES SECURITIES
Given that RBI is emphasising containing inflation below the target rate and projections stating inflation to remain above 6 percent till March 2023, this implies that RBI will likely deliver a 25 bps hike in February 2023.
"Terminal rate will be 6.5 percent as inflation is projected to average 5.2 percent in the second half of FY24, implying no need for rate hikes at the April policy meeting,” said Ambani.
Analyst: Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
In line with expectations, the RBI hiked the repo rate by 35 bps to 6.25 percent. Overall, inflation concerns continue especially as core inflation remains sticky and elevated.
"Growth concerns remain limited, for now. We believe the RBI is now close to the terminal rate with the real policy rate, based on a few quarters ahead of inflation, around 100 bps positive. The February policy decision will be finely split between a pause and a last 25 bps hike with a bias towards a hike given that near-term inflation readings are likely to remain relatively elevated around 5.5 percent," said Rakshit.
Analyst: Madhavi Arora, Lead Economist, Emkay Global Financial Services
"We note that while the RBI Governor justified the rupee’s resilience on the net, a relatively dovish tone would not have augured well for the rupee, which has seen sharp correction versus peers in the last couple of days. This has been on account of already low forward premia in forex, and signalling a pause would have further pressured the forex forward premia on the downside, making carry trades less attractive for FPIs, implying fears of unwinding of these trades, ceteris paribus," said Arora.
"We still think that the RBI would not turn too restrictive, however, the extent of global disruption will remain key. We are closely watching the global pace of inflation deceleration and how the impending recession will shape DM central bank policies, which could influence the RBI’s reaction function. The still-fluid global situation might require frequent adjustments in macro and policy assessments ahead as far as terminal rates are concerned,” Arora said.
Analyst: Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company
The RBI has given a “Main Hoon Na” (we are there) policy, reassuring the market. In a world where central banks are fighting to regain credibility, the RBI stands tall managing conflicting objectives of growth and inflation admirably. A data-driven RBI will keep on playing balls on merit and continue to keep the growth scoreboard moving with inflation under check.
Analyst: Apurva Sheth, Head of Market Perspectives, Samco Securities
"We believe by maintaining its stance RBI has dodged being in a box and will have the liberty to look at future data points to navigate its future course of action. Taking cues from the macro factors the RBI maintained its CPI targets at 6.7 percent for FY23. Going forward there could be a tug-of-war between declining inflation in India and rising interest rates by the US Fed – against this backdrop, it would be interesting to see how well the RBI would manage its repo rates," said Sheth.
Sheth said the adjusted growth outlook could have been triggered due to a lower-than-estimated growth in manufacturing and exports suffering due to the global slowdown.
Analyst: Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company
Even though headline CPI is likely to fall below the MPC’s upper tolerance band of 6 percent over the next few months, we remain some distance away from the ultimate policy goal of 4 percent headline CPI.
"While policy rates in India may not go much higher from here, the bar for any possible policy pivot remains high. In this backdrop, we expect the 10-year government securities to trade in the range of 7.25-7.45 percent in the near term," said Bhatt.
Analyst: Deepak Agrawal, Chief Investment Officer, Debt Fund, Kotak Mahindra Asset Management Company
RBI hiked the repo rate by 35 bps in line with market expectations with a 5:1 vote. The stance was maintained at “withdrawal of accommodation” with a 4:2 vote.
MPC was of the view that further calibration action is warranted to keep inflation expectations anchored, to breakcore inflation persistence and to contain a second-round effect.
"We continue to expect a terminal repo rate of 6.5 percent in this rate cycle," said Agrawal.
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