RBI's MPC meet: More bark than bite

8 Dec 2022 , 10:32 AM

Analysts at IIFL Capital Services think there could be one more hike of 25 basis points going forward, before a pause to make room for the lag effect of hikes around the world and in India. They expect inflation to gradually come off in 2023 and long yields to stay at current levels, based on comfortable fiscal position. Considering rich valuations in general, analysts at IIFL Capital Services favor a defensive stance and domestic growth stories, with their top picks coming from Banks, FMCG, Auto and Insurance.

No surprise from policy announcements

RBI MPC hiked policy rates by 35 basis points (5:1 majority) to 6.25% – in line with IIFL/consensus. Accordingly, SDF stands adjusted to 6% and MSF rate to 6.5%. There was no change in CRR rate. The RBI maintained its current stance of withdrawal of accommodation, given that the policy rate adjusted for inflation is still accommodative and system liquidity still in surplus.

Outlook downgraded on growth, but maintained on inflation

Real GDP forecast for FY23 downgraded from 7% to 6.8%. Quarterly forecasts see marginal downgrades- Q3FY23: 4.4%; Q4FY23: 4.2% (earlier 4.6% for both quarters). Q1FY24 projected to grow at 7.1% and Q2FY24 at 5.9%. Slowing of growth in Q3 and Q4 of FY23, mainly on the back of base adjustments.

Average inflation forecast for FY23 remains unchanged at 6.7%. Quarterly inflation breakup: Q3FY23: 6.6% (earlier 6.5%); Q4FY23: 5.9% (earlier 5.8%); Q1FY24: 5% and Q2FY24: 5.4%. These inflation forecasts factor-in assumptions of a normal monsoon and average crude levels (Indian basket) at US$100 a barrel.

RBI confident on growth, not so much on inflation

The governor sounded quite confident on growth – regardless of a downgrade to 6.8% – emphasizing the resilience of Indian economy amidst turbulent external macro. On inflation, the Banking regulator acknowledged moderation, while also underscoring watchfulness and warning against complacency, given the persistently high core inflation above target and second round effects.

50 basis points hike behind, though expectations of terminal hikes rise

While RBI shifted to lower size of rate hikes (35 basis points post last three hikes of 50 basis points), markets still viewed the policy hawkish as there were no signals of RBI approaching end of rate-hiking cycle. However, the US – where inflation is a much bigger problem – has seen such signals from FED members; some US indicators are signalling weakness and potential moderation in inflation (increasing part-time employment, falling full-time, rising credit card balances, falling savings pile post 2020/21 stimulus checks, falling home prices, falling new lease rentals). INR too looks stable.

Stable long-term rates and rupee

Long-term rates should find support from comfortable fiscal position, as budgeted deficits and market borrowings can be beaten. INR strength should come from global monetary tightening reaching its last phase (lower hikes indicated by FED), Brent trading below $80/bbl even post EU ban getting effective, FII selling in India abating (net buyers to the tune of $10 billion in past four months) and improving flows from remittances (World Bank estimate 12% growth to $100 billion in CY22 and 23% in Q1). FX reserves position is another source of comfort.

Maintain below-consensus GDP growth, defensive with domestic bias

Analysts at IIFL Capital Services have maintained their lower-than-consensus GDP growth estimate since March 2022 of 6.5%. Nifty @20x offers little upside, but India’s relatively superior investibility should keep multiple premium intact. Expect domestic growth stories to outperform in the medium term, yet seek some safety in a defensive bias in the near term.