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Below View On RBI Policy comments-by Anitha Rangan, Economist, Equirus

RBI Policy hiked repo rate by 25 bp in line with consensus taking repo rate to 6.5%. Overall, while the governor sounded cautious on the external front balancing it with optimism from the domestic front, we would conclude that the hike will most likely be followed by a pause. Four statements from the policy statement conclude us to believe that a pause may be in the offing. First, a 4-2 vote on the policy and stance, from a 5-1 vote in the Dec’22 policy. From the minutes of the earlier policy there were a couple of members who were neutral, who could turn to the pause side if data is supportive. Second, mention that the real policy rate is now nudged into positive territory for the first time since the hike.

Negative real returns have been the key contention for rise in rates. With inflation expected to trend downward, real returns will improve and therefore the need for further hikes becomes limited. Third, signs of moderation in inflation. Inflation of 5.3% for FY24, with oil at $95/bbl is an aggressive estimate. If food prices trend downward led by cereals, and oil remains contained, scope for inflation to outperform RBI estimates exist.

Governor mentioned that FY23 inflation will be better than RBI estimates. Fourth, liquidity has moved into a tighter zone over the period of hike and therefore maintaining the withdrawal of accommodation stance should be sufficient to inflation and rates contained. From the currency front, this hike is likely to take care of the near-term weakness if any led by strong US payroll data and dollar strength. Policy statement also noted that the current account deficit will moderate in the second half of FY23. Therefore, unless there are any further significant headwinds, the case for pause does strengthen after this policy.

Noting that the inflation for FY23 is likely to trend below RBI expectations, RBI gave an estimate of 5.3% for inflation in FY24 ranging from 5.0% in Q1 to 5.6% in Q4. With an inflation target of 5.6% for Q4 FY24, the scope for rate cuts are ruled out at least for next 3-4 quarters unless the inflation data comes closer to 4%.

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