RBI MPC Outcome | Reactions From Industry Experts On Monetary Policy Review

Six-member monetary policy committee, headed by Governor Shaktikanta Das, on Wednesday announced the hike in repo rate by 50 basis points

As the Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC), headed by Governor Shaktikanta Das, on Wednesday announced the hike in repo rate by 50 basis points (bps), reactions from across the industry poured in. This hike is a two-year high of 4.9 per cent as it doubled down to tame inflation that has soared in the past couple of months.

The RBI has also raised its inflation forecast for FY23 by 100 basis points to 6.7 per cent, with the quarterly projections predicting the MPC will fail to meet its mandate. Das said that the RBI has retained the GDP growth forecast for FY23 at 7.2 per cent.

The governor in his speech mentioned that an upside risk to inflation persists, while a recent spike in tomato, crude prices fuelling inflation. 

Some top voices from the industry have expressed their views on the matter:

"The RBI has leaned in favour of anchoring inflationary expectations in its pursuit of finding a solution to the prevailing growth -- inflation conundrum brought on by the ongoing war in East Europe. In doing so, it has brought policy interest rates closer to pre-pandemic levels in its approach to ensure that inflationary pressure moderates. The RBI’s concern on containing inflation is appreciated, given that it is impinging on the margins of businesses and also hurting consumer demand. Going forward, inflation is likely to moderate owing to the fiscal interventions of the government and favorable monsoon which would soften food prices. As inflation is to a great extent supply side led, CII would recommend that coordinated monetary and fiscal interventions should continue. This will help to largely surmount the global headwinds that are driving inflation and unlock the growth potential of the economy and industry."

Sanjiv Bajaj, President, CII

 

"On the expected lines, the RBI unanimously re-emphasised its endeavour to contain inflation through withdrawal of the accommodative stance and normalisation of the policy rates. 50bps hike in the repo rate was very much factored in the 10 year yields which moved above 7.5 per cent before the policy outcome, only to retreat lower to 7.45 per cent. Markets are taking respite from the fact that the central bank did not move on the CRR hike, as feared earlier. On inflation, the RBI now sees CPI average for FY23 to 6.7 per cent, 100 bps higher than the earlier estimate, with the revision primarily attributed to food prices. CPI inflation is likely to remain above the tolerance level of 6 per cent till December 2022 and fall to 5.8 per cent in Q4 FY23. RBI emphasised that the recent fiscal measures have moderated the inflation expectations. However, the inflation projection seemed to be a conservative one, as it assumes Oil to have peaked out and monsoon rainfall to be a normal one. So, the CPI projections are subject to revisions, depending on the magnitude of the supply-side risks. On growth, RBI retains GDP growth for FY23 at 7.2 per cent, emphasising improving aggregate demand and capacity utilisation in manufacturing. On the policy rate outlook, the pronounced priority to combat inflation has paved the path for further rate hikes, with the repo rate seen proximal to 5.75 per cent by the end of FY23."

Amar Ambani, Head, Institutional Equities, YES SECURITIES

 

"The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We expect 35 bps repo rate hike in the August policy to 5.25 per cent and repo rate at 5.75 per cent by end-FY23. Along with pushing the repo rate to above the pre-pandemic level, a 35 bps hike would also signal a gradual normalisation in the policy actions while being adequately hawkish. We also expect another 50 bps hike in CRR to 5 per cent by end-FY23 to move the liquidity conditions towards the pre-pandemic levels.”

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

 

"With the retail inflation at 7.79 per cent for April 2022, highest since May, 2014, the recent statements from the Governor, and signals from other major central banks, the hike does not come as a surprise. The only question that remained was how much of an increase in the short term would address this. In the April MPC, the RBI had attempted to buttress economic recovery by maintaining status quo on the rates, only to increase the rates and the cash reserve ratio, through an off-cycle MPC, to control the galloping inflation. The RBI is fighting an uphill battle in the current geo-political situation to keep the inflation below the benchmark of 6 per cent, which it has missed for the past four quarters. We can expect further jumps in the in the next few quarters. The recent off-cycle hike has had an impact on the housing sector which had started picking up after two years of a lull, and this increase is going to dampen the spirits of homebuyers. The manufacturing sector will also see a pull back on the numbers as the retail purse strings tighten.   An impact on the stock market is also inevitable. In May, after the surprise increase, the markets also saw a sharp downfall with the BSE falling more than 1,400 points and the NSE settling below 16,700, recording a fall of 391 points, leaving investors poorer by almost 6.27 lakh crores. However, one hopes that the investors are better prepared for the increase this time."

Anjana Potti, Partner, J Sagar Associates (JSA)

 

“To knock high inflation out of the park, central banks are having to step out of the crease and come out swinging with tight monetary policy. Today’s hike by 50 bps on the top of an inter-meeting 40 bps hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve. The RBI’s upward revision of the inflation forecast for FY23 to 6.7 per cent from 5.7 per cent in April, was also in line with our expectations, but still lower than our forecast of 7.2 per cent. So, we believe that we are still far from the finishing line and that more frontloaded rate hikes are on the offing."

Aurodeep Nandi, India Economist and Vice-President, Nomura

 

"Markets expect regulators to have better information and hence act proactively in order to maintain macro stability and equilibrium. Regulators need to prioritise their target variable between growth and inflation. In India, we have raging inflation at 7.8 per cent, higher capacity utilisation, and growing consumer confidence, and yet the policy rate has been hiked to 4.90 per cent only, which is lower than pre-pandemic levels. The ideal effective overnight rate should be closer to 6 per cent, but at this pace, it might take us 3-4 policies more to reach there. Monetary policies tend to work with significant lags on the real economy. The longer we wait in raising rates adequately, the more we are letting the underlying inflationary fires simmer. Don't expect inflationary expectations to come down and most likely the 10-year G-sec yield would trade between 8.25-8.50 in the next couple of quarters"

Sandeep Bagla, CEO, Trust Mutual Fund 

 

"The MPC's actions are in line with the minutes of their previous meeting and indications thereafter. Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers. Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term. However, there are some indications that global prices may moderate soon which may allow for a pause sooner rather than later."

Rajiv Shastri, Director & CEO, NJ AMC

 

"The RBI hikes the repo/SDF rate to 4.9 per cent/4.65 per cent today. This is higher than our forecast of 4.75 per cent/4.5 per cent and the market consensus was for a hike of 40-50bps. The decision was taken unanimously by all MPC members. Interestingly, while the RBI increases its FY23 inflation forecast to 6.7 per cent, GDP growth projection is kept unchanged at 7.2%. We wonder that if higher interest rates don't hurt growth, how will it help bring down inflation? It also suggests that most of the excess inflation is due to global/supply-side factors. The Governor mentions that even after today's hikes, the policy rate is below the pre-pandemic levels (of 5.15 per cent/4.9 per cent). Since the RBI continues to forecast strong growth, it is very likely that it delivers another 25bps hike on 4th of August before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints."

Nikhil Gupta, Chief Economist, MOFSL Group