Expecting a 50 bps hike in repo rate by RBI tomorrow: Upasana Chachra, Morgan Stanley

We think that there is a need to normalise the negative real rates that the economy is currently under, given that growth conditions have been improving and while inflation outlook has improved with this moderation in commodity prices and better than expected trend of food prices, it still remains a bit challenging and uncertain given all the global development. So for tomorrow, we are looking for a 50 bps rate increase in the repo rate.

The Reserve Bank has also been quite clear that it has no level for the rupee but it will be coming in to rein in volatility. Channels checks show that forex reserves have been used. Does Morgan Stanley have any expectation of commentary when it comes for the currency as well as the action that we have been seeing as far as bond yields go?
As you rightly said, RBI would not really comment a lot on its forex policy or on the level of rupee that it is looking to target and that would probably continue. So we are not necessarily looking for something very specific from a currency perspective. Something on liquidity management and also the stance or the tone of the monetary policy will be important to give direction to rates and rupee in the quarters ahead.

If you look at interbank liquidity, it has come off quite significantly and is driven by all the pressures from the balance of payment side. That’s what we would be looking out for if the RBI or the Governor touches upon that aspect and what are their thoughts and the way forward given that the stance of the RBI has been to ensure that liquidity is available for productive sectors and the moderation in liquidity would be done in a phased manner over a multiyear period.

So we would not really be looking for something very specific on this but probably the overall tone and stance will be important from an asset market crisis behaviour viewpoint. From a fundamental perspective, the fact that commodity prices have started to ease off should take off some of the pressure from the current account and the trade deficit numbers that we have seen in the past probably should mark the peak and from a fundamental perspective, that should also take off some of the pressure from the rupee.

You expect a 50 bps repo hike, that means 35-35.50 – about 120 bps in total. Would that derail the economy? Don’t you think it will have an impact on home loans? Wouldn’t it be tightening too much considering how commodity prices have come down?
If you look at where policy rates are right now and you know the state of inflation and growth, and if we look at where we were pre-pandemic, currently we are at 4.9% of the policy rate. Inflation is at 7%. Yes the outlook has improved but as we all know, it is pretty uncertain. At the same time, the growth trend has improved quite a bit especially from the pandemic led disruptions when we entered these very loose monetary policy situations.

If we look at that and then build on the policy rate increase that we are forecasting, taking the rates to 5.4% will still mean that even on forward looking inflation, you will be maintaining negative real rates. That itself shows that the monetary policy is not going to be overtly tight and it should not derail the domestic demand recovery.

The key over here would be that domestic demand is being supported by a lot of reopening vibrancy which has been playing out. In the last couple of months, we are seeing a very strong growth from consumption, especially the services side consumption of the economy.

Also some of the reform measures that the government has been taking in the last two to three years will start to play out and they are already showing some signs of improvement with nascent improvement in the capex related indicators. I think the economy will be able to absorb some of this increase in real rates that is happening given that growth has improved. If we take into account inflation, in our view, this trend is not really going to lead to an overtly tightening stance from the Reserve Bank.