FICCI encouraged by Governor’s statement that liquidity will be available
The RBI Monetary Policy Committee’s (MPC) 35bps repo rates hike to 6.25% was expected, though decision was not unanimous, with 5-1 in favor of the increase, says Avnish Jain, Head Fixed Income, Canara Robeco Asset Management Company.
The stance also remains unchanged at “withdrawal of accommodation” with 4-2 vote, he noted in comments on the 7 Dec 2022 RBI decision.
Indians were not surprised by the fifth consecutive rate hike this year.
The no change in stance was probably on back of inflation remaining above 6%. It is expected to come down marginally below 6% (@5.9%) in Jan-Mar 23 quarter.
RBI MPC expects inflation to drop to 5% in 1QFY24. Growth estimates were marginally reduced to 6.8% for FY2023.
The policy was a tad hawkish as the Governor Shaktikanta Das has pointed out the core inflation remains sticky and is still high for comfort.
He further indicated that the MPC’s mandate is to bring inflation back to 4% range.
There was also no indication that tightening is coming to an end, noted Jain. This indicates that the MPC is data driven and may have chosen not to provide any forward guidance in the current volatile global situation.
Hence, a 25bps rate hike in Feb 23 is still in play, as the US FED hikes are likely to be there in 1QCY2023, believes Jain.
The markets sold off as there was expectation on a dovish stance and some indication on end tightening cycle. 10Y G-SEC yields, which touched a low of 7.20% prior to policy announcement, touched a high of 7.31% post policy, as market expectations were belied.
Markets were further hoping for change in stance, which also did not happen, added to selling pressure.
On the positive side oil prices are down from highs, with Brent trading below USD80/bbl. Commodity prices have also trended lower over the year providing respite from some price pressures. India CPI has trended lower since peaking at 7.80% in April.
However protracted global geo-political tensions, tightening financial conditions as well as slowing global growth may continue to keep market volatile.
Markets are likely to consolidate post the recent selloff. A sharp increase in yields is not expected as inflation is likely to show moderation in coming months.
“We expect repo rate to peak at 6.50% after a final hike of 25 bps in Feb 23 monetary policy. In near term 10Y G-SEC may trade in range of 7.20-7.35% as per our opinion,” said Jain.
Separately, FICCI President Sanjiv Mehta said, “The Reserve Bank’s policy action hiking the policy repo rate by 35 bps was widely anticipated as the war against inflation is still far from over.”
Retail inflation has remained above the Central Bank’s tolerance threshold of 6% through the year 2022. Core inflation remains sticky, and uncertainty continues to surround RBI’s near-term inflation outlook given the complex geo-political developments in Europe, recurrence of adverse climate related events and the still high commodity prices globally.
“While the CPI inflation projection has been maintained at 6.7% for 2022-23 and some early signs of inflation cooling down on a sequential basis are coming to fore, we need to see this trend emerge on a durable basis for RBI to indicate a change in stance,” said Mehta.
“Furthermore, while the Indian economy remains resilient, the RBI has revised downward its GDP growth forecast for 2022-23 to 6.8% from 7.0% in the last monetary policy announcement.
“Even at this slightly lower rate of growth, India continues to be amongst the fastest growing economies globally and we are encouraged by the Governor’s statement that liquidity will be made available for productive activities as required so that the growth impulses get nurtured,” Mehta said. fiinews.com
