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MPC hikes policy repo rate by 50bp – the third rate action in FY23 to date

We are close to the end of the rate hike cycle

* The RBI, on 8th Jun’22, hiked the repo rate by 50bp to 4.9%. Consequently, the effective policy rate – i.e. Standing Deposit Facility (SDF) – now stands at 4.65% and the Marginal Standing Facility (MSF)/bank rate stands at 5.15%. This is the third rate action by the RBI in FY23 to date. For the first time, the statement excluded the “decision to remain accommodative”, and continued focusing on the “withdrawal of accommodation” to contain inflation while supporting growth. Both the decisions were unanimous.

* While the repo rate hike was expected, the RBI’s inflation forecast was more sought after in this policy. The RBI raised its inflation forecast to 6.7% YoY in FY23 from 5.7% projected earlier. The global geopolitical crisis and the consequent elevated commodity prices were the major reason for this rise. However, the RBI kept its real GDP growth forecast unchanged at 7.2% YoY (closer to market consensus of 7.5% YoY and higher than our estimate of ~6.5% YoY) backed by recovery in economic activities in services, investments, capital utilization, bank credit, et al. This came as a surprise to us as it is not clear how higher interest rates would help bring down inflation without hurting growth.

* The RBI Governor, in his statement, categorically mentioned that the repo rate is still below the pre-pandemic level (of 5.15%). This indicates another 25bp possible rate hike in the next policy meeting (scheduled on 4 th Aug’22). However, we believe that the terminal repo/SDF rate will be 5.50%/5.25% in this cycle, implying that the end of rate hikes is near.

* We have mentioned in our recent report that inflation in India is not demand-led and we remain firm in our view. Fiscal policy is more effective in controlling inflation that is supply-led. Hence, we fear that steep monetary tightening might hurt real GDP growth in 2HFY23E and FY24E.

I. Jun’22 policy rate hike was a no-brainer

* Policy repo rate raised to 4.9%...: The RBI, on 8th Jun’22, hiked the repo rate by 50bp to 4.9%. Consequently, the SDF now stands at 4.65% and the MSF/bank rate stands at 5.15%. This is the third rate action by the RBI in FY23 to date. Cumulatively, the RBI has hiked policy rates by 130bp over the past two months. While the first was the introduction of the SDF at 3.75% on 8th Apr’22, the second was an off-cycle policy decision of raising all policy rates by 40bp on 4th May’22. For the first time, the statement excluded the “decision to remain accommodative”, and continued focusing on the “withdrawal of accommodation” to contain inflation while supporting growth. Both the decisions were unanimous.

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