RBI MPC: Status quo policy in Indian Economy: IIFL Capital Services

9 Jun 2023 , 11:25 AM

The RBI’s MPC 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 but instead straightaway on a possible pivot (now why should RBI pivot if growth is good?). Analysts of IIFL Capital Services remain concerned about growth and insufficient evidence of pvt. capex (Nominal GFCF growth fell from an already low 11.8% in Q3 to 11.5% in Q4, and this including a major govt. capex acceleration), though surveys paint a rosy picture (PMI >57 for some time), and cap goods companies have come out smelling like roses in Q4 and earlier. RBI cut its FY24 inflation forecast for the second time in two MPC meetings, and marginally front ended GDP growth during FY24 while maintaining full yr. number. However, they feel a global growth slowdown from monetary tightening looms and will impact exports and investments in India as well as hurting consumption further (IIFLe FY24 GDP growth at 5.8%). Analysts of IIFL Capital Services feel that later this year markets may be caught between rate-cuts and earnings recession and a defensive stance would be appropriate, given recent (and ongoing) rally.

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%; no change in CRR rate as well. 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. They feel that continuation in stance is appropriate for now given uncertainty around El Nino, US Fed’s rate action going forward as well as increase in system liquidity due to Rs.2000 note withdrawal (almost 50% or Rs.1.8trn of notes have been taken back with almost 85% coming as deposits as per governor in the post policy presser).

RBI continues above-consensus 6.5% GDP FY24 growth: 

Governor in the presser sounded confident on achieving RBI’s GDP growth forecast giving it space to focus on getting inflation back to 4% target on durable basis instead of operating in 4-6% target range. RBI maintained its FY24

GDP growth forecast at 6.5%. Slight change in quarterly break-up:

Q1FY24 projected to grow at 8% (up from 7.8% in last meeting), Q2FY24 at 6.5% (up from 6.2%), Q3FY24 at 6% (down from 6.1%) and Q4FY24 at 5.7% (down from 5.9%). Avg. inflation for FY24 was marginally downgraded to 5.1% from 5.2% (IIFLe at 5%). Quarterly breakup: Q1FY24 – 4.6% (down from 5.1% in last meeting), Q2FY24 – 5.2% (down from 5.4%), Q3FY24 – 5.4% (unchanged), Q4FY24 – 5.2% (unchanged).

Markets caught between rate-cuts and earnings recession: 

Thanks to steep monetary tightening in AEs (500bps in the US in last 14 months), analyst of IIFL Capital Services fear a pronounced growth slowdown centered around Q4FY2023, some signs of which are already visible. They expect earnings estimate cuts across geographies and don’t pin much hope on a China recovery. In India too export led sectors will initially see an impact but this could spread. GFCF growth was strong in Q4FY23 but drops if you exclude govt. capex. Nominal GFCF to GDP ratio has been stagnant at 28% for 6 years compared to 34% 10 years ago. Private consumption struggle is compounded by K-shaped behaviour. AE Central banks will react at some point with rate cuts, but it would be too late to stop downgrades. Analysts of IIFL Capital Services will likely see outflows from EMs. In this environment, they don’t see a major capex wave happening, though monetary easing later in the year or Q1FY2024 could trigger a risk-on phase.

Expect slightly softer INR and benign yields: 

In Q4, trade deficit improved, led by fallen imports, which also boosted GDP growth by 1.5ppt. FX Reserves are strong at $595bn. DXY has traded down to 104 from levels of 110+, but China’s struggles suggest that they may let their currency drift down. Analysts of IIFL Capital Services expect the massive monetary tightening in the US to take its toll on earnings, and risk sentiment, and expect outflows by Q3, and hence INR may drift down to 84-85.