RBI no longer really needs to press the panic button

On August 5, the Monetary Policy Committee (MPC) of the Reserve Bank of India will announce its decision on policy rates, with the bias towards front-loading rate hikes still being the base case.

Appropriate relief has been seen in commodity packs including crude oil. However, we are not out of the woods yet, as India is heavily dependent on crude oil imports apart from gold and electronics as our top three import commodities. At the same time, the RBI cannot ignore the US Federal Reserve, which has been in top gear in terms of monetary tightening – and rightly so, as the US CPI is at a four-decade high of over 9%. The recent 75 basis point hike in the fed funds rate is a step in that direction. The Fed also focuses heavily on getting inflation back on target.

To be fair, inflation in India is reasonably well behaved. The CPI-based inflation averaged 7.3% in Q1 FY23, lower than the RBI’s forecast of 7.5%. The performance of most food items in July so far has been relatively better than in June. In fact, the prices of TOP (tomato-onion-potato) increased marginally in July, compared to an increase of around 11% in June. Based on this trend, we can see that Q2 average inflation is also lowering RBI’s forecast of 7.4%.

Okay, if things look good on inflation so far, does RBI have the ability to press the pause button for now? Not necessary. As stated earlier, the US Fed is moving ahead with the pace of rate hikes. This means renewed strength for the US dollar ($). The dollar has stood tall against most emerging and developed market currencies, including the Indian rupee. ) which has seen around 5.8% depreciation in FY13. The euro is down about 8.3%, while the pound sterling is down about 8%. It is important to ensure a stable bias on the rupee, especially when our forex reserves are also depleting. Therefore, it is imperative that India continue with the Rate Hike Act for some more time.

What is the rate increase likely?

If we look at the market, (interest rate swap curve) it is already increasing the rate by at least 50 bps in every policy. In the June MPC minutes, RBI Deputy Governor Michael Patra said, “The objective should be to push the repo rate to a height that is at least four quarters above inflation forecast, knowing that monetary policy works with gaps.” Is.” The forecast for Q4FY23 CPI is 5.80%. Hence, we may have to achieve at least 6% repo rate by March 2023, unless there is a sharp fall in crude oil.

While the inflation-cautious cap is active, the RBI also needs to be mindful of declining growth across the globe. The IMF recently slashed its forecast for global GDP growth. Now, it expects the global economy to grow by 3.2% in CY22 and 2.9% in CY23, down 0.4% and 0.7%, respectively, from its previous forecast.

Thus, it is reasonable to assume that there can be no rush with the increase in rates. Our basic case would be to see a 50 bps rate hike in repo, which currently stands at 4.9%. However, it’s also quite possible that it’s a bit low, even at 35 bps. Several scenarios are possible, but we are of the view that RBI really need not press the panic button for now and maintain the momentum displayed in the last few policy meetings. Either way, the markets have discounted the same and may not react negatively if the rate hike is up to 50 bps. Anything above that could be a bad turn for yields, which are struggling to stay afloat. So, all eyes were on RBI MPC, the same way Arjun in Mahabharata focused on the fish’s eye!

The author is Chief Investment Officer (Loans) and Head Products, Kotak Mahindra Asset Management Company. The views and opinions expressed in the column are personal and do not necessarily reflect the views of the organization or Kotak Group.

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