RBI MPC policy review: HDFC Bank

7 Dec 2022 , 01:09 PM

The RBI policy announcement today was in line with expectations in terms of raising the policy rate by 35bps and keeping the policy stance unchanged. However, the policy tone was distinctly more hawkish than expected. When a central bank combines its sanguine view on growth with continued concerns on inflation — particularly the persistence in core inflation — it suggests that it is prepared to continue its fight against inflation and has the space and willingness to raise rates further.  The central bank emphasized that it is not ready to let up its inflation battle and aims to bring down inflation below 6% in the near term and then closer to 4% over the medium term.

There were other signs in the governor’s statement that suggested that tightness in financial conditions could intensify going forward. While the RBI continued to re-iterate that it would continue to manage liquidity conditions through fine tunning operations, it cautioned markets to wean themselves off the surplus liquidity overhang and not take it for granted.

Today’s policy announcement does provide a soft support for the rupee ahead of the Fed meeting next week and can be viewed perhaps as an attempt by the RBI to continue aligning itself with the still hawkish G7 central banks. Furthermore, the RBI’s continued emphasis on the factors that lend support to the rupee, signals its preference for a stable rupee going forward implying intervention on both sides of the market to keep it range bound into 2023.

In terms of forecasts, GDP growth was revised down marginally by 20bps to 6.8% for FY23, although the central bank showed comfort around the current growth momentum. On inflation, the full year figures were kept unchanged at 6.7%. Bottom line is the policy announcement today signalled that more rate hikes are in the offing. We expect the terminal rate to be close 6.5-6.75%.