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Pre RBI Monetary Policy Quote 29 September 2022 By Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance.

State of economy

The global economy is strongly caught between the twin challenges of high inflation and low growth, with major forecasts suggesting a further slowdown in 2022-end and 2023. The focus has largely shifted from Russia- Ukraine crisis to the resultant impact on global GDP growth and high inflation. Implications of hugely unanticipated duration of the war have trimmed global growth projections and forced upward revision in inflationary forecasts, forcing central banks around the world in an overdrive mode and almost simultaneously raising interest rates with the exception of China. The recent inflation data from both US and India suggests inflation is more implanted than previously anticipated.

Indian Currency

Aggressive US Fed action will have direct and indirect consequences for our markets. With the continued strengthening of USD there is a very strong adverse impact on our country’s currency which also acts as a deterrent towards maintaining macro stability. RBI had been trying hard to protect the stability of the currency and maintain a relative strength of rupee vis a vis its emerging market peers. However, that has come at the backdrop of net release of $100 billion of forex reserve by the RBI. Hence it may not be prudent for RBI to continue with the same process. The yields have also tightened a bit therefore managing to strike an optimum balance between interest rates and exchange rates may not be easy.

Rate hike expected in the next MPC meeting

As the August inflation print of 7.0% is much higher than the mandate given to MPC to contain inflation in the range of 2.0%-6.0%. As a sequel it’s too early to expect RBI to adopt a moderate view on the rate hike like pausing the rate hike at this juncture. We believe that RBI may opt for a rate hike between 35-50 bps in the forthcoming MPC meeting. Whilst the recent downtrend in the oil prices certainly provides some relief to RBI for cooling off the inflation levels but the uneven distribution of rainfall poses some challenges in price rise of agri-commodities and increase in services consumption can lead to spike in inflation levels.

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