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Repo rate hiked further, MPC focused on containing inflation:

The Monetary Policy Committee (MPC) decided by a majority of five members out of six to further hike policy repo rate by 50bps to 5.9% on September 30, ‘22. It remains focused on withdrawal of accommodation to ensure inflation is contained within the target (4% target with upper tolerance limit of 6%) while supporting growth. Persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain second-round effects. This action will likely support medium-term growth prospects.

To trigger further increase in deposit and lending rates:

Post repo rate hike in May’22, MCLR was hiked by 70-95bps by leading banks. Banks have also raised deposit rates across maturity buckets with peak retail TD rates being at 5.75%-6.1%. Also, wholesale peak TD rates are in the range of 6.0-6.5%% for leading private banks. Now, with another 50bps repo rate hike, rates will be further revised upwards.

Transmission in EBR regime to be more effective with repo rate hike:

With increase in repo rate over FY23, the pace of transmission will likely be more effective. Proportion of EBR-linked loans (of the floating rate loans) for private bank is as high as 65% as of Jun’22 (compared to 61% / 43% / 17.5% in Mar’22 / Mar’21 / Mar’20) while that for PSU banks was at 36% in Jun’22 (vs 33.3% / 20.3% / 4.8% in Mar’22 / Mar’21 / Mar’20). More than 55% of PSU banks’ floating rate loans are still linked to MCLR. Amongst banks, ~50% of overall loan portfolio of Kotak is linked to EBLR, followed by HDFCB and Axis at 41% each, and SBI at 34%. SBI and IndusInd have relatively higher proportion of loans linked to MCLR at 49% and 45%, respectively.

Inflation likely to remain above tolerance level; CPI inflation projection retained at 6.7% for FY23: Consumer price inflation remains elevated and above the upper tolerance band of the target due to large adverse supply shocks, some firming up of domestic demand, and spill overs from global financial markets. The recent correction in global commodity prices including crude oil, if sustained, may ease cost pressures in coming months. CPI inflation projections are retained at 6.7% (6.7% / 5.7% / 4.5% earlier) for FY23 with Q2FY23 @7.1% (7.4% / 5%), Q3FY23 @6.5% (6.4% / 6.2% /5.4%), Q4FY23 @5.8% (5.8% / 5.1% / 4.2%) and Q1FY23 @5% with risks evenly balanced. To keep inflation expectations anchored and restrain the broadening of price pressures, calibrated monetary policy action is needed. Given lower than expected real GDP print for Q1FY23, growth forecast for FY23 now stands at 7.0% (7.2%) with Q2FY23 growth estimated @6.3% (6.2%), Q3 @4.6% (4.1%) and Q4 @4.6% (4.0%). Q1FY24 GDP growth is forecast at 7.2%.

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