By Deepak Agrawal
The MPC today decided to hike repo rate by 25 bps to 6.50%. The decision was voted 4:2 in favour of hike. Dr Ashima Goyal and Professor Jayant Verma voted against a hike. This decision was in line with market expectation. Market was divided with respect to change in monetary policy stance. However with 4:2 vote, the MPC decided to maintain “withdrawal of accommodation stance”. Dr Ashima Goyal and Professor Jayant Verma voted against the monetary policy stance. The Governor Statement on inflation has highlighted the fall in inflation and also highlighted further monetary actions would be data dependent.
“Headline inflation has moderated with negative momentum in November and December 2022, but the stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation. Thus, monetary policy has to be tailored to ensuring a durable disinflation process. A rate hike of 25 basis points is considered as appropriate at the current juncture. The reduction in the size of the rate hike provides the opportunity to evaluate the effects of the actions taken so far on the inflation outlook and on the economy at large. It also provides elbow room to weigh all incoming data and forecasts to determine appropriate actions and policy stance, going forward. Monetary policy will continue to be agile and alert to the moving parts in the inflation trajectory to effectively address the challenges for the economy”.
On the basis on urban consumption & improving rural consumption, strong investment and agricultural activity, GDP growth is seen at 6.4% in FY24, despite slower global growth and domestic tightening. RBI lowered its FY23 CPI inflation forecast to 6.5% (from 6.7%), RBI has forecasted average FY24 at 5.3% .These forecasts assume oil prices will average 95$/bbl. In Feb 2022, the RBI projected very low inflation (one year-forward) to convince everyone that rates will be lower for longer (when effective rates were at 3.35%). Today, when effective rates are at 6.5% it is using higher inflation forecasts to justify higher for longer.
Given narrowing interest rate differential between Repo Rate & US Fed rate, the overall intention of the RBI is to pushback on expectations that the cycle has ended, and retain all options for future. We think both growth and inflation will surprise on the downside relative to the RBI’s projections. Given our view of average inflation for FY24 would be lower than RBI forecast of 5.30%, we would have real rate of 150 bps, similar to pre-pandemic levels. Hence we believe we have seen the last rate hike in this hiking cycle and RBI likely to stay on hold during the CY2023.
(The authors is Deepak Agrawal, CIO – Debt at Kotak Mahindra Asset Management Company. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)