By Ritika Chhabra
The RBI hiked the repo rate by 50bps to 5.9% and maintained the withdrawal of the accommodative stance to curtail the rising inflation and balance currency amidst rising interest rates globally. The rate hike was on the expected lines as most market participants were expecting this raise after an aggressive rate hike of 75bps by the Fed. However, the highlight of the MPC meeting was the positive commentary on the domestic economic outlook by the central bank. While it cut the GDP projection for FY23 marginally to 7% from 7.2% earlier, mainly due to a lower GDP print in the last quarter, it appeared confident on the growth momentum to continue despite external headwinds. The governor also assured that it has ample forex reserves to meet the near-term demands and it is not overspending to contain the rupee volatility.
India continues to be relatively better placed to handle the crisis with buoyant domestic demand when fears of recession hover over the global economy. The private urban consumption is holding up well in Q2FY23 on hopes of a robust festival season and the rural demand is picking up pace gradually. The non-oil and non-gold imports are resilient highlighting healthy domestic demand. The bank credit is at a 9-year high, recording 16% growth year on year. The corporate balance sheet is leaner today, with the corporate debt to GDP ratio at a 15-year low. The capacity utilization for the manufacturing sector, at 74.3, is the highest in 3 years.
That said, a sharp slowdown in global growth will have repercussions on the domestic economy through an imbalance in the balance of payments, widening CAD, and reversal of FII inflows. The FII flows have already started to reverse again after net positive inflows in the month of July and August. As per the SEBI data, the FIIs sold a net of Rs. 8010 crores (till 28th Sept) worth of equities in September. The unfettered rise of the US dollar is creating havoc among global currencies including the Indian Rupee. In addition, upside risks to domestic inflation remain due to disrupted global supply chains and global uncertainties.
The RBI governor refrained from giving any forward guidance on future rate hikes and said that going forward the rate hikes will be data-driven. Given the uncertainty in the global inflation trajectory and the action of global central banks in response to the incoming inflation data, the domestic monetary policy will be largely driven by the global monetary tightening cycle. Going by the Fed dot-plot and a terminal rate projection of 4.6% in the US, we may see another 50-75bps of cumulative rate hikes this financial year. The domestic economy and markets might look decoupled from the rest of the world, but the decoupling might not sustain for long if the global economic and financial instability get worse from here.
(Ritika Chhabra is the Economist and Quant Analyst at Prabhudas Lilladher. Views expressed are author’s own. Please consult your financial advisor before investing.)