RBI Monetary Policy: All in Unison

The RBI MPC decided to raise policy rates by 50 bps for the third consecutive time, in line with market expectations. In view of MPC, rate hike was in line to keep inflation expectations anchored and support medium term growth prospective. This action can be seen in tune with other major global central banks.

Policy Action

• Policy repo rate increased by 50bps to 5.90%


• The Standing Deposit Facility (SDF) rate stands adjusted to 5.65% and


• Marginal Standing Facility (MSF) rate and the Bank Rate to 6.15%.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Market Reaction

As the rate hike was as per market expectation, the large part of rate hikes was already priced in the market. Market largely remained range bound, except for very short end of the curve which has rallied by ~5-10 bps.

Highlights of the Policy

1. Inflation likely to be above tolerance level – Estimates remain unchanged
   
   Geopolitical conditions have weighed heavily on the inflation outlook. RBI’s enterprise survey points to some easing of input cost and output price pressures, however, the pass-through of input costs to end-prices remains incomplete. The projections of Q1 FY24 at 5% implying that the glide path to inflation could take anywhere between 12-24 months to achieve. RBI has kept its estimate for the CPI unchanged from its last meeting.
   
   

   Source: RBI monetary policy statement dated 30^th Sept 2022



2. System Liquidity withdrawal continues
   
   Average system liquidity for August – September 2022 stood at र2.3 lakh Cr eased from र3.8 lakh Cr in June-July. Forex interventions may have been the primary reason for this liquidity absorption. India’s foreign exchange reserves were placed at US$537.5 billion as on September 23, 2022.


3. Improving outlook on growth
   
   RBI is positive on growth outlook, with rural demand catching up and urban demand expected to strengthen further. Though there is headwind from geopolitical tensions, tightening global financial conditions and the slowing external demand pose downside risks to net exports and hence to India’s GDP outlook.
   
   

   Source: RBI monetary policy statement dated 30^th Sept 2022. Figure in bracket are estimated from RBI monetary policy statement dated 5^th August 2022

Our View

The policy tone was more neutral and just like in the last policy, this time as well RBI did not provide future guidance on the policy action. We expect, the US Federal Reserve to remain hawkish over the next few policies. The MPC is likely to follow its hawkish policy stance, wherein the expectation is another rate hike of ~35bps in December taking policy rates above 6%. We believe the terminal wave will settle at 6-6.5% of policy rate.

Today’s policy was in line with market expectations and hence the market has not reacted much to it. A large part of rate hikes has been priced in both globally and domestically. And hence, we are not bearish on expected further rate hikes.

The current yield curve presents material opportunities for investors in the short to medium term space. For investors with medium term investment horizon (3 Years+), incremental allocations to duration may offer significant risk reward opportunities. For investors with short term investment horizons (6 months - 2 years) money market strategies continue to remain attractive offering competitive ‘carry’ and low volatility.

In line with RBI estimates, we also expect inflation to cool off. Growth might be slightly below RBI projection but will overall remain positive from medium term perspective, as Indian economy is reasonably doing well on growth front. Mostly on account of low impact from external sector vulnerability, despite significant global volatility. While we believe, policy rate hikes will continue till there is visibility on the inflation glide path, large rate hikes are unlikely going forward.

Allocation and strategy is based on the current market conditions and is subject to changes depending on the fund manager’s view of the markets. Data as on 23^rd Sept, 2022. ^As on 31^st August 2022

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Source of Data: RBI Governor’ Statement, RBI Monetary Policy Statement & RBI post policy press conference dated 30^th Sept 2022, Axis MF Research

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