RBI Monetary Policy Committee continues to be guarded – delivers “not done yet” message | The Financial Express

RBI Monetary Policy Committee continues to be guarded – delivers “not done yet” message

The MPC with a 4:2 vote, also decided to remain focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

RBI Monetary Policy Committee continues to be guarded – delivers “not done yet” message
As per RBI, GDP growth in India remains resilient. Real GDP forecast for FY23 has been pegged lower to 6.8% from 7%.

By Deepak Agrawal

Based on RBI’s assessment of the macroeconomic situation and its outlook, the Monetary Policy Committee (MPC) voted 5:1 to increase the policy repo rate by 35 basis points to 6.25 per cent. This was largely in line with market expectation. MPC member Professor Jayant Verma voted against the 35 bps rate hike. With this raise, the RBI has increased repo rate by 225 bps from April 2022 till date and the overnight rates have moved up by 300 bps.

The MPC with a 4:2 vote, also decided to remain focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Professor Jayant Verma and Dr Ashima Goyal voted against the monetary policy stance. Market participants were expecting some changes/ tweaks in the MPC stance with respect to rate trajectory going ahead. Hence, the market was disappointed with marginally hawkish commentary and hence, we have seen marginal uptick in yields.

Also read: Markets solve RBI Governor Das’ riddle, figure out Monetary Policy is ‘hawkish’ after all

As per RBI, GDP growth in India remains resilient. Real GDP forecast for FY23 has been pegged lower to 6.8% from 7%. GDP for H1FY24 is pegged at 6.5%. Even after downward revision of GDP, the RBI highlighted that India will still be among the fastest growing major economies in the world.

RBI expects inflation to moderate, but the battle against inflation is not over. Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events remain. RBI has maintained FY23 inflation target at 6.7%. CPI inflation for H1FY24 is pegged at 5.2%, on assumption of a normal monsoon.

Also read: RBI monetary policy highlights: 7 key announcements by RBI Governor Shaktikanta Das

Cognizant of past monetary actions, RBI will continue to keep Arjuna’s eye on the evolving inflation dynamics while keeping growth aspect in mind and be ready to act as may be necessary. The recent drop in global bond yields, commodities and dollar index have reduced financial stability risks and the need for rate hikes to address the same.

According to MPC member Dr Michael Patra, lowering the size of rate hike is also a shift which market should take note of. However, we are not yet ready to lift the pedal of monetary tightening. Inflation is likely to come within RBI’s target range by Q1FY24 and financial stability risks are reducing. Further, monetary policy gets transmitted across the market with a lag. Considering that the current real repo rate is 100 bps (6.25%) above RBI’s H1FY24 inflation estimate (5.2%), we may at best see one more increase of 25 bps in the repo rate in February 2023, taking the repo rate to 6.5%.

Based on our view that we are nearing the end of a rate hiking cycle, we suggest investors to increase duration of their investment portfolio over the next three months.

(Deepak Agrawal, Chief Investment Officer, Debt Fund, Kotak Mahindra Asset Management Company. Views expressed are the author’s own.)

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 07-12-2022 at 04:22:43 pm
Photos
8 Photos
Miss Universe 2023: USA’s R’Bonne Gabriel crowned in a glittering ceremony: See Stunning Photos
7 Photos
Nepal plane crash: Flight with 72 onboard crashes near Pokhara International Airport – Images
7 Photos
Business heads run at Mumbai Marathon, more than 50,000 people participate in event – See pictures here