IGI Logo

We revise our terminal repo rate assumption to ~6.5%

* The RBI hiked its key policy rate (repo) by 50bp to 5.9% on 30th Sep’22. Consequently, the SDF and the MSF/bank rate now stands at 5.65% and 6.15%, respectively. The hike was in line with the market and our expectations. This is the fourth rate action by the central bank in FY23 till date. Cumulatively, the RBI has the hiked repo rate by 190bp (excluding the 40bp hike in the SDF in Apr’22) in three scheduled and one out-of-turn policy meetings.

* The MPC reiterated its continued focus on ‘withdrawal of accommodation’ to contain inflation, while supporting growth. The rate hike decision was arrived at by a 5-1 majority, with Dr. Ashima Goyal voting for a 35bp rate hike. The decision on its stance too was made with a 5-1 majority as Dr. Jayanth Varma expressed reservations on the stance.

* While the RBI kept its inflation forecast unchanged at 6.7%, it revised its real FY23 GDP growth forecast downward to 7% YoY from 7.2% earlier. Its CPI inflation/real GDP growth assumptions stood at 5%/7.2% for 1QFY24.

* The RBI did not change its inflation forecast and seems confident about India’s GDP growth. RBI has kept its 2QFY23 inflation projections unchanged at 7.1%, which implies that it expects headline inflation ~7.5% in Sep’22, up from 7% in Aug’22. If so, it will call for another 50bp rate hike in Dec’22 (especially if the US Federal Reserve repeats its 75bp rate hike in Nov’22). Our (revised) base case now is a 35bp hike in Dec’22, followed by another 25bp hike in Feb’23. It is, thus, very likely that the terminal rate during this hiking cycle can be as high as 6.5% by FY23-end.

* Notwithstanding the weaker-than-expected real GDP growth in 1QFY23, RBI has increased its projections for 2HFY23 (to 4.6% from ~4% earlier) and for FY24 (to 6.5% from 6.3% in Apr’22, as per the Monetary Policy Report). It reflects RBI’s confidence in India’s divergent growth which can fuel further rate hikes. As we do not see India remaining isolated from a global slowdown, we expect further growth downgrades in the economy, especially for FY24.

* Policy repo rate raised to 5.9%: The RBI hiked its key policy rate (repo) by 50bp to 5.9% on 30th Sep’22. Consequently, the SDF and the MSF/bank rate now stands at 5.65% and 6.15%, respectively. The hike was in line with the market and our expectations. This is the fourth rate action by the central bank in FY23 till date. Cumulatively, the RBI has the hiked repo rate by 190bp (excluding the 40bp hike in the SDF in Apr’22). The MPC reiterated its continued focus on ‘withdrawal of accommodation’ to contain inflation, while supporting growth. The rate hike decision was arrived at by a 5-1 majority, with Dr. Goyal voting for a 35bp rate hike. The decision on its stance too was made with a 5-1 majority as Dr. Varma expressed reservations on the stance.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer