RBI MPC – Status Quo on rates and stance but temporary I-CRR added

11 Aug 2023 , 11:14 AM

The RBI’s MPC 1) continued, as expected, with its pause on policy rate (6.5%) and stance of removal of accommodation − in the presser, there were no questions on growth or on pivot (on expected lines) 2) introduced incremental CRR at 10% temporarily but banks have not been posting in VRRR window suggesting there wasn’t so much surplus liquidity, so this is a hardening of stance from RBI 3) maintained growth forecasts but reiterated global growth slowdown expectations 4) raised its inflation forecasts, and mentioned El Nino, food inflation in India and internationally but also China disinflation, improved Indian sowing data and rain in rice growing regions. A rate hike seems ruled out as RBI said that WALR has risen by only 169bps (and still rising) vs 250bps of repo. Q1 corporate results so far have been mixed in terms of earnings beat/miss – revenue softness has been compensated by raw-mat cost reduction. Economy CU has inched up to 76.3%. All-in-all analysts of IIFL Capital Services think it will be status quo for the present and a rate cut in Q4FY24/Q1FY25. 

Status quo on rates & stance: 

RBI MPC continued its pause on repo rate at 6.5% unanimously, in line with expectations. Accordingly, SDF stands unchanged at 6.25% and MSF rate at 6.75%. The central bank maintained its current stance of withdrawal of accommodation (5:1 majority) — in line with analysts of IIFL Capital Services expectations but a section of market was expecting a change to neutral. CRR on incremental NDTL between 19/5 and 28/7 will be 10% leading to overall system impact on banks’ NIMs of 1bp, but a higher 3bps on HDFCB due to HDFC NDTL (assuming that ICRR would be applied on incremental NDTL only for HDFC Ltd as well). An extreme interpretation would be that entire HDFC book would be considered incremental and attract 10% CRR, but it is still unclear and might be clarified in due course. Overall system liquidity will still be surplus as per analysts of IIFL Capital Services estimate. This seems a blunt implementation at a time banks have been resisting VRRR.

RBI maintains 6.5% GDP FY24 growth but raises inflation forecast: 

RBI maintained its FY24 GDP growth forecasts for FY24 at 6.5% and introduced Q1FY25 at 6.6%. Inflation for FY24 was upped to 5.4% (revised from 5.1% in the last meeting). Quarterly inflation breakup: Q2FY24 at 6.2% (up from 5.2% in last meeting, mainly due to flare up in vegetable prices), Q3FY24 at 5.7% (5.4%), Q4FY24 at 5.2% (unchanged) and Q1FY25 at 5.2%. Governor indicated vegetable prices could correct sharply as in the past and hence MPC will “look through” but added that in increasing frequency of such shocks could raise inflation expectations and spill over to other items trigger some action (not necessarily rate hike). 

Expect slightly softer INR and benign yields: 

India’s FX reserves are strong at $604bn. DXY has traded down to 102 from levels of 110+. CNY has drifted down vs USD by 7% from recent lows of mid-Jan. Analysts of IIFL Capital Services expect the massive monetary tightening in the US to take its toll on earnings, and risk sentiment, and hence INR may drift down to 84-85.