Post RBI policy, expect downward revisions to FY23 GDP growth: IIFL Capital Services

9 Jun 2022 , 12:45 PM

MPC’s unanimous decision to further hike the repo rate by 50bps to 4.9% was broadly in line with consensus estimate (SDF rate adjusted to 4.65% and MSF to 5.15%; CRR unchanged). Regarding its stance, MPC made a minor adjustment by omitting use of the word ‘accommodative’, while it continues to prioritize inflation over growth. Average inflation for FY23 was revised upwards to 6.7% from 5.7% earlier, with inflation coming below the 6% target only by Q4FY23. There was no change in the FY23 GDP growth forecast of 7.2%.

IIFL Capital Services’ analysts feel the RBI will keep hiking the policy rate till it exceeds CPI inflation (this could be around 5.5% − a bit lower than RBI’s Q4FY23 forecast before building in rate-hike impact), thus being in sync with the onset of a global monetary winter. In such an environment, they prefer to stay defensive on their portfolio positioning and include ITC at the expense of Chola (CIFC) in their ‘Top BUYs’ list.

Inflation risk has worsened, in their view, owing to:

1) Oil prices: a) China re-opening leading to surge in demand for Oil − China processed 11% less crude oil in April and its revival could add 3 mbpd to demand, as per various estimates; b) EU self-imposed sanctions on sea-borne Russian oil (~75% of total imports) which would worsen the crude rerouting problem and soak up more crude inventory + shipping and gradually erode Russian output.

2) Food prices: a) international prices show no sign of cooling off — CRB food index up almost 25% YoY and is almost 2x in 2 years; b) agriculture input costs also remain elevated − Potash prices up 6x in 2 years and 50% in 3 months to US$1,200/tonne; 40% of the global supply from Russia and Belarus cut off by sanctions. Global warming is a structural headwind.

3) Second-round impact of the above in other categories and increased pass-through by producers as demand returns.

Also, manufacturing deglobalization is an emerging trend, along with greater investment in renewables and not to mention luxuries like ESG, all of which are inflationary. But in the short run, supply chain easing with China re-opening and supply-glut of finished goods (bullwhip effect) coinciding with consumption shift from goods to services can pull down retail inflation, before factoring in monetary tightening.

Analysts at IIFL Capital Services also expect downward revisions to FY23 GDP growth, as high inflation and monetary tightening start impacting consumption (especially discretionary) and investments. Higher normalization in real yields in USA will trigger bigger capital outflows from India which can impact INR versus USD and, in turn, amplify the difference in real-yields movement, leading to more outflows.

They are, hence, not too constructive on the broad macro and choose a defensive stance.

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