1. Repo Rate Hike and Policy Stance Adjustment:
In line with expectations, the RBI raised the repo rate by 50 basis points to 5.90%, maintaining a stance of “withdrawal of accommodation.” This signals a tightening of monetary policy to manage economic conditions effectively.
2. GDP Growth and Inflation Projections:
The central bank adjusted its FY23 GDP growth estimate downward by 20 basis points to 7.0%, while retaining the inflation forecast at 6.7%. Notably, one MPC member voted for a lower rate hike, introducing an element of dissent within the committee.
3. MPC Dynamics and Voting Outcome:
The Monetary Policy Committee, with a 5-1 majority vote, implemented the rate hike, reflecting a consensus for a more stringent monetary policy. This move is underpinned by a commitment to achieving the inflation target while supporting sustainable economic growth.
4. Future Rate Hike Expectations and Market Outlook:
Anticipating further tightening, market analysts expect another 35 basis points hike in the repo rate in December 2022, with a subsequent pause for assessment. The analysis suggests a range of 7.2-7.6% for 10Y g-sec yield in the remaining FY23. Additionally, the USD/INR exchange rate is projected to move towards 84, deviating from the earlier estimate of 81.
5. Economic Outlook and Global Factors:
The RBI’s adjustment in GDP growth forecasts reflects global uncertainties and increased risks. Geopolitical concerns, coupled with tightening monetary policies globally, contribute to a cautious outlook. Despite potential global economic headwinds, the analysis suggests that India’s economic resilience remains relatively strong.
6. Inflation and External Sector Concerns:
Global factors, such as falling commodity prices, particularly in crude oil, contribute to a positive outlook for inflation in India. However, concerns about crop damage due to weather conditions persist. External trade dynamics, including a wide current account deficit and dollar strength, contribute to volatility in the rupee.
7. MPC’s Approach and Market Impact:
The MPC’s commitment to inflation targeting is evident in its gradual transition to a positive real rate environment. The analysis notes a potential backdoor rate tightening through liquidity moderation. Market participants find comfort in the expected moderation of inflation, influencing term premiums. The 10Y g-sec yield is projected to remain within a range, while the rupee’s depreciation is expected to be moderate, considering global and domestic factors.
This comprehensive review outlines the recent policy actions, economic adjustments, and the anticipated impact on various sectors, providing insights into the broader economic landscape.