RBI MPC policy- in-line hike, intriguing verbals: IIFL Capital Services

3 Oct 2022 , 10:20 AM

No surprise from policy announcements

RBI MPC hiked policy rates by 50 basis points (5:1 majority) to 5.9%, in line with IIFL/consensus estimates. Accordingly, SDF stands adjusted to 5.65% and MSF rate to 6.15%. There was no change in CRR rate. The RBI maintained its current stance of withdrawal of accommodation.

Growth and inflation outlook largely unchanged

Real GDP forecast for FY23 cut to 7%, but quarterly breakup is now more optimistic by average of 0.4% despite Q1 miss (Q2FY23: 6.3%; Q3FY23: 4.6%; Q4FY23: 4.6%). Q1FY24 is projected to grow at 7.4% instead of 6.7% previously. Hence, they have cut absolute output estimated in Q1FY24, but raised in last three quarters of FY23. Average inflation forecast for FY23 remains unchanged at 6.7%.

Quarterly inflation breakup: Q2FY23: 7.1%; Q3FY23: 6.5% (earlier 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$100 a barrel.

Worsening global growth but sunny commentary on domestic

RBI noted worsening global macro and recession threat, but in the domestic context, used words like “take-off, not landing”. Analysts at IIFL Capital Services are a bit puzzled, but prefer to stick to the numbers, while noting that India macro looks healthier than international. MPC’s assumption of US$100/barrel of crude is a bit surprising, considering discounted Russian imports and current sub-90 levels, which look to hold as global macro weakens.

Macro risks lurk…stay defensive

Analysts at IIFL Capital Services believe, main international macro risks are:

1) China not resorting to strong stimulus
2) EU forced to tighten despite inflation ex-food, fuel being quite low
3) Interest rate normalization in the US — currently 10-yr yield minus CPI is < -4%, though improved from -6% a few months ago.
In recent weeks, there have been interventions by PBOC (verbal), BoJ (currency) and BoE (gilts) – mainly driven by the stronger USD.

Analysts at IIFL Capital Services foresee $/INR at 85, but not materially worse, as inherent strength of domestic economy will play a role in influencing capital flows. We are on the road, but by no means at the end of it, and more volatility remains.

Strong government revenues are a silver lining; as highlighted, a sustained compliance drive, especially on GST, has contributed to indirect as well as direct tax revenue growth being robust, and eventual borrowing by GoI may come in below, keeping a tighter lid on rates. Despite this, analysts at IIFL Capital Services consider current market valuations to be not reflecting risk, and continue with defensive stance.

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