RBI on a steady resolve to unwind accommodation
- The latest 50 bps hike in Aug’22 was the third consecutive hike in the current cycle since May’22. At 5.4%, repo rate rose by 140 bps in a span of 4 months. In our view, another 80-100 bps rise is expected in the next 4-6 months.
- The Liquidity Adjustment Facility corridor now ranges from 5.15% (SDF) to 5.65% (MSF).
- Surplus liquidity is declining steadily. Fell by ~Rs 2.9 Lakh crores between May’22 and July’22. This is a function of higher rates and steady rise in lending activity by banks.
- Unlike developed market central banks like Fed and BoE which are also facing strong recessionary headwinds, RBI does not seem to be forecasting an economic contraction or slowdown in the next 12 months. That gives it a larger headroom to roll back its accommodative stance and rein in the demand led part of inflation.
- Real policy rates in UK, US, Eurozone range between (-) 7%-8% while after today’s hike, Indian real policy rate is at (-) 1.5%. India can expect to generate positive rates sooner, attracting foreign investors by offering better carry opportunities.
- Recession in developed markets may prove to help the supply led inflation in India through softening global prices, especially that of commodities and energy.
- With the INR performing better than major currencies, impact of a higher current account deficit (CAD) can be efficiently managed with the strong pile up of forex reserves. India continues to have the 4th largest foreign reserves in the world.
- RBI expects CPI to fall below the upper tolerance of 6% by Q4 FY23, backed by good monsoons expectations, declining global metal prices and softening international food prices. This appears somewhat overambitious in our opinion. Kharif acreage has been low due to errant monsoon conditions. Rice with 10% weight in CPI basket is a kharif crop.
- We have been forecasting a frontloading of Repo rates till 6% by Apr’23. The current rate hike of 50bps is in sync with our expectations. However, majority of the market participants did not expect RBI to appear as hawkish as it did today, with perhaps limiting to a 35 bps hike. This surprised the Indian GSEC market, with the benchmark 10 year yields rising to 7.25% immediately after the announcement, compared to a close of 7.15% on 4th Aug.
- With 44% of bank loans linked to external benchmarks (mostly repo), lending rates will increase sharply in the rest of FY23 and H1 FY24. However, bank deposit rates may not witness a similar trajectory, improving net interest margins of lenders.
Market reaction
| Yesterday Close | Post Policy (11 AM) | |
|---|---|---|
| 10 Year GSEC | 7.16% | 7.26% |
| Wtd Call Rate | 4.59% | 5.24% |
| USDINR | 79.4 | 79.02 |
| Nifty 50 | 17,382 | 17,467 |
| Yesterday Close | Post Policy (11 AM) | |
|---|---|---|
| 10 Year GSEC | 7.16% | 7.26% |
| Wtd Call Rate | 4.59% | 5.24% |
| USDINR | 79.4 | 79.02 |
| Nifty 50 | 17,382 | 17,467 |
Policy rate changes across key markets in 2022:
| Country | Trajectory of Policy Rates in 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Emerging | Jan | Feb | March | April | May | June | July | August | |
| China | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | |
| India | 4.00 | 4.00 | 4.00 | 4.00 | 4.40 | 4.90 | 4.90 | 5.40 | |
| South Africa | 4.00 | 4.00 | 4.25 | 4.25 | 4.75 | 4.75 | 5.50 | 5.50 | |
| Brazil | 9.25 | 10.75 | 11.75 | 11.75 | 12.75 | 13.25 | 13.25 | 13.75 | |
| Developed | |||||||||
| U.S | 0.25 | 0.25 | 0.50 | 0.50 | 1.00 | 1.75 | 2.50 | 2.50 | |
| U.K | 0.25 | 0.50 | 0.75 | 0.75 | 1.00 | 1.25 | 1.25 | 1.75 | |
| EuroZone | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.50 | 0.50 | |
| Country | Trajectory of Policy Rates in 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Emerging | Jan | Feb | March | April | May | June | July | August | |
| China | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | 3.70 | |
| India | 4.00 | 4.00 | 4.00 | 4.00 | 4.40 | 4.90 | 4.90 | 5.40 | |
| South Africa | 4.00 | 4.00 | 4.25 | 4.25 | 4.75 | 4.75 | 5.50 | 5.50 | |
| Brazil | 9.25 | 10.75 | 11.75 | 11.75 | 12.75 | 13.25 | 13.25 | 13.75 | |
| Developed | U.S | 0.25 | 0.25 | 0.50 | 0.50 | 1.00 | 1.75 | 2.50 | 2.50 |
| U.K | 0.25 | 0.50 | 0.75 | 0.75 | 1.00 | 1.25 | 1.25 | 1.75 | |
| EuroZone | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.50 | 0.50 | |
MPC’s rationale for hike in Repo:
- Resilience in domestic economic activity
- CPI breaching the upper tolerance limit of 6%
- Global financial markets volatility affecting domestic markets
- Currency depreciation
- Sustained high inflation destabilizing expected inflation and harming growth prospects.
MPC’s view on what is supporting growth:
- Kharif sowing well (marginally lower than last year).
- Demand side : Production of consumer durables and sale of passenger vehicles suggest improvement.
- Rural vs Urban growth : Tractor sales contracted in rural markets though 2 wheeler sales are up. Growth in urban sector on account of revival of contact sensitive industries.
- Services sector growth : Railways, ports, toll collection and commercial vehicle sales remained robust. Import of capital goods robust.
- PMI at an 8-month high.
- Capacity utilization in manufacturing sector in Q4 at 75.3% relative to its long-term average of 73.7%.
- Bank credit growth accelerated to 14% from 5.4% same time last year.
- Private sector manufacturing sector profitability remained buoyant.
- Expansion in bank credit to improve further due to rising demand for Capex. This will lead to higher capacity utilization.
Some projected headwinds:
- Geographical tensions
- Global tightening
- Global recession risks
- Volatility in financial markets globally.
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
- Trends within the infrastructure, Real Estate and Renewable Energy sectors
- Impact analysis of new regulations and policies on lending and capital flow
Team:
Debopam Chaudhuri, Head of Research and Ratings
Ria Rattanpal, Research Associate
Komal Chavan, Marketing Associate
91-9819239926, dc@truboardpartners.com
Author:
Debopam Chaudhuri, Head of Research and Ratings
Ria Rattanpal, Research Associate
Komal Chavan, Marketing Associate
+91-9819239926
dc@truboardpartners.com
Disclaimer
The data and analysis covered in this report of TruQuest has been compiled by TruBoard Pvt Ltd and its associates (TruBoard) based upon information available to the public and sources believed to be reliable. Though utmost care has been taken to ensure its accuracy, no representation or warranty, express or implied is made that it is accurate or complete. TruBoard has reviewed the data, so far as it includes current or historical information which is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Information in certain instances consists of compilations and/or estimates representing TruBoard’s opinion based on statistical procedures, as TruBoard deems appropriate. Sources of information are not always under the control of TruBoard. TruBoard accepts no liability and will not be liable for any loss of damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary) from use of this data, howsoever arising, and including any loss, damage or expense arising from, but not limited to any defect, error, imperfection, fault, mistake or inaccuracy with this document, its content.