RBI monetary policy tomorrow: Key indicators to watch out for

The US annual inflation rate slowed for the 4th consecutive month to 7.7% in October. This was the lowest since January 2022 and was lower than forecasts of 8%. US Fed Chairman Jerome Powell said the pace of rate hikes would slow down, maybe as soon as December, after four consecutive jumbo 0.75 percentage point hikes.

The Eurozone, which has been struggling, saw inflation cool off at 10% in November compared to economists’ forecast of 10.4%. The last three months have seen the ECB (European Central Bank) increase rates by 200 basis points to combat inflation.

Retail inflation in India also slowed to a 3-month low of 6.77% in October. The general consensus is that inflation has peaked, and going forward, we will see core inflation moderate across markets. This will give central banks the impetus to slow-down their tightening cycle and reverse it. However, this will be a drawn out process and will take up a major part of 2023.

While inflation is slowing down, there is also a good chance that economies will also slow down. It is almost a given that the world’s major economies, including the US, will experience a slowdown in 2023.

India’s Q2FY23 real GDP at 6.3% came in line with expectations. However, with favourable base effects fading, growth is expected to normalise. Lower crude prices (prices are now $81 levels compared to $120 levels in June) bode well for India in terms of trade. This is largely due to China plunging back into lockdowns as Covid-19 cases approach record levels. Apart from crude, metal prices have also fallen.

That said, there’s a lot of geo-political uncertainty that can impact growth. Private sector capex is likely to be delayed given the uncertain global and domestic demand conditions.

The RBI’s MPC is meeting this week to decide on its rate hike. The two questions that’ll influence the RBI’s rate hike decision will be: Will inflation continue to drop? Will the Indian economy also follow global economies, which are expected to slow down?

We will have to wait to find answers to both questions. A large part of these answers is out of RBI’s hands. The factors that will determine these answers are:

Russia: Will it stop its fight with Ukraine? Will it restrict gas supplies to Europe?

Global financial market volatility: Apart from a slowing US economy, the food insecurity crisis and soaring energy costs post a threat.

We expect a 35 basis point hike from the RBI and a wait-and-watch approach later. RBI will keenly watch inflation numbers going ahead. The post-policy conference will hold a lot of importance in determining RBI’s forward-looking actions. In the short term, and we have said this before, Indian markets are very highly valued compared to peers. While India is still a bright spot in a troubled world economy, there is little value in the short-to-medium term. The short-term growth outlook may prevent earnings upgrades. While inflation is falling, it is still not below the RBI’s comfort level of 6%.

Investors would do well to keep a close watch on macro factors and stick to well-researched stocks.

(Srikanth Subramanian is the CEO of Kotak Cherry)