RBI MPC - In-line; growth outlook weak: IIFL Capital Services

8 Aug 2022 , 01:00 PM

No surprise from policy announcements

RBI MPC unanimously hiked policy rates by 50 basis points (bps) to 5.4%, in line with IIFL estimates; market consensus was of 35 bps hikes. Accordingly, SDF stands adjusted to 5.15% and MSF rate to 5.65%. There was no change in CRR rate. The RBI maintained its current stance of withdrawal of accommodation, though Professor JR Verma (a member) was in dissent on the stance.

RBI maintained its outlook on growth and inflation

Real GDP forecast for FY23 remains unchanged at 7.2%. Quarterly break-up too remained unchanged (Q1FY23: 16.2%; Q2FY23: 6.2%; Q3FY23: 4.1%; Q4FY23: 4%). Q1FY24 is projected to grow at 6.7%. Slowing of growth in Q3FY23 & Q4FY23 is mainly due to base adjustments.

Average inflation forecast for FY23 remains unchanged at 6.7%. Inflation is expected to remain above the upper tolerance limit of 6% till the end of 2022, and then substantially ease, to reach 5% by the start of next fiscal year. Quarterly inflation breakup: Q2FY23: 7.1%; Q3FY23: 6.4%; Q4FY23: 5.8%; Q1FY24: 5%. These inflation forecasts factor in assumptions of a normal monsoon and average crude levels (Indian basket) at US$105 a barrel.

Global growth outlook carries downside risk

Analysts at IIFL Capital Services broadly note that:

a)       Global growth had seen a temporary high during the bounce back phase of the pandemic period, but in 2022, it showed signs of slowing down, especially after commodities shot up to uncomfortable levels

b)      Global central bank tightening has been fairly sharp, in playing catch-up after negative inflation surprises, and much of it is yet to impact economic activity

c)       Governments have been withdrawing stimulus; and

d)      Activity in Europe could also be impacted if Russia squeezes gas supplies

These factors should also bring down inflation.

India better placed on growth

While IIFL Capital Services is below consensus on India growth estimates for the aforementioned reasons, the domestic economy could perform relatively well:

a) As the RBI MPC pointed out, capacity utilization has touched 75% − a level from which investment should begin growth

b) Corporate and bank balance-sheet strengthening has been one of the highlights of the pandemic period

c) Tailwinds like China+1 will continue to favor India at a time when the government is emphasizing on the Make-in-India initiative.

Certainly, stronger domestic activity and weak exports should together lead to CAD widening, but an economic-activity slowdown internationally is also likely to cause crude to cool off, helping with CAD. Finally, we should be reasonably covered through FDI. This, plus our strong FX position, suggests US$/INR to be stable at ~80 levels, and yields should not see an abrupt spike.