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Below is Perspective on RBI MPC announcement by Madhavi Arora, Lead Economist, Emkay Global Financial Services

? The MPC raised repo rate by another 50bps to 5.40% with the supposed stance unchanged at “focus on withdrawal of accommodation”.  The tone was balanced and similar to June, aiming to tame inflation and external risks.

The broad narrative on inflation and growth remains unchanged while liquidity vigilance would imply two-way fine-tuning operations as and when warranted.

Bonds have sold off massively, as they were positioned for a softer policy led by media speculations. Banking stocks are up ~1% on an average. INR has remained largely agnostic.

? With the RBI yet to reach its supposed neutral real rate (0.8-1%), with forward inflation as the benchmark, there appeared still a valid argument for the RBI to front load its rate hike.

This also comes on the back of the DM policy stances, where in the Fed has already reached the neutral rate and on its way to get highly restrictive by year-end.

? We think we are near-peak RBI-hawkishness, led by falling risk premia of the entire commodity price complex and incremental rate hikes will be lower.

However, we understand the situation globally is still fluid, and macro assessments might require frequent adjustments ahead from the policy perspective.

While inflation may remain elevated in the near term despite Peak-Inflation, yet there would be a slide seen in 4QFY23.

? We are also closely watching global pace of inflation deceleration and how the impending recession will shape DM central bank policies, which could have implications for the RBI.

While global disinflation is imminent, in one way (soft-landing) or another (recession), however the price stickiness will make the disinflationary path non-linear in coming months. ( See” Peakflation vs. Recession: Stairway to Heaven or Highway to Hell”)

? We maintain FY23 could see RBI’s policy rates terminating around 5.75%-5.90%, with the central bank showing its intent to keep real rates near estimated natural rate. The need for terminal rates to go too higher than that seems low to us at this point

-- While external sector dynamics will need a close watch amid high global uncertainties, INR pressures are unlikely to dictate MPC’s policy decision materially.

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