RBI monetary policy preview: What’s in store for D-Street investors on Friday

The Monetary Policy Committee’s three-day meeting began on Wednesday, and Governor Shaktikanta Das will read out the policy decision at 10 AM.

Most economists and market experts believe that the central bank will front-load rate hikes to control inflation.

Consumer inflation in India has remained above the RBI’s tolerance target band of 2-6% since January. In August, consumer price inflation rose to 7.0% from a five-month low of 6.7% a month ago.

However, most experts feel the RBI will retain its guidance of 6.7% consumer inflation for 2022-23 (April-March). While inflation projection may remain the same, it will be crucial to see if the central bank also retains its growth outlook.

This is because the area of worry is on the global front as the Federal Reserve has guided for steeper rate hikes to check soaring prices. The crisis in Europe has only made things worse and further dampened the global growth outlook.

Even though the domestic indicators are encouraging and put India in a relatively better spot in the global context, the recent sell-off across asset classes does show that the domestic economy cannot remain insulated from global shocks.

In the backdrop of this, coupled with the rising US bond yields and dollar outflows, it is key to see if the GDP forecast for 2022-23 is retained at 7.2%.

Who expects what from the MPC:

Suvodeep Rakshit, Senior economist at Kotak Institutional Equities
Inflation prints over the coming months are expected to remain elevated, albeit moderating gradually to below MPC’s upper threshold of 6% in 4QFY23. With the MPC expected to continue with rate hikes, the lagged impact of monetary tightening will help curb inflation expectations.

Accordingly, we expect the average CPI inflation trajectory to be lower than the RBI’s estimates by around 60 bps in 1HCY23. We maintain our FY23 CPI inflation estimate at 6.5%. We retain our view that the MPC will continue with calibrated repo rate hikes towards 6% by end-CY2022 with a 35 bps hike in the September policy, along with the shift in the operating target from SDF to repo rate by end-FY23.

Indraneel Pan, Chief economist,
We expect the RBI to hike the repo rate by 50 bps and continue raising for the next two policies for a terminal rate of 6.50% by end-March 2023.

In our post-policy review note of August, we indicated that the RBI might go softer in future policies. The critical understanding then was that global central banks themselves would slow the pace of hiking and that Indian inflation would cool off. But the most important development over the last couple of months has been the continued aggression by the global central banks.

India’s macroeconomic landscape is looking vulnerable now, and India is once again starting at a twin-deficit problem.

Madhavi Arora, economist, Emkay Global Financial Services
The fast-evolving world order and consistent repricing of the Fed’s outsized hikes are strong-arming the EMs. This exposes the instability inherent in the classic EM central bank trilemma: one cannot have a stable currency, unfettered capital flows, and independent monetary policy all at the same time. This painful adjustment has not spared the RBI either, which is set to deliver another front-loaded 50 bps hike.

The hike would also make the ex-post real repo rate positive, but it would still be lower than RBI’s estimated real neutral rate.

Liquidity tightness would lead to faster and better transmission, implying that the RBI may not get too restrictive, and the terminal rate could hover near the estimated real rates, i.e., not more than 100 bps hikes ahead. However, the situation globally is still fluid, and macro assessments might require frequent adjustments ahead from a policy perspective.

Ashish Chaturmohta, Director and Head, Advisory Research – Services

Most street participants are pencilling another 35-50 bps rate hike by RBI in the upcoming policy meeting. A combination of weaker Q2 GDP print, higher CPI and aggressive stance of the US Fed to tame inflation is likely to force RBI to continue to front-load its policy actions.

Even on the currency front, the USD/INR is testing life-high levels of 81.66 as the USD continues to gain strength against most major currencies.

RBI has already sold over $90 billion of FX reserves over the last year to about $545.6 billion, its lowest level in the past 2 years.

On the brighter side, even though Q2 GDP growth came in below expectations, consumption and investments remained strong, high frequency activity data also points towards strong consumption near the festive season.

We believe that the softening commodity and crude prices would reflect in RBI’s policy decision. Given the considerable uncertainty, we expect the MPC to remain ambiguous and data dependent.