RBI policy

June RBI Policy – No Surprises

RBI raised repo rate by 50 bps to 4.90% in the June RBI Policy. Thus repo rate has been increased by 90 bps in the last one month. MPC vote was unanimous and has decided to keep stance withdrawal from accommodative. MSF Rate & Bank rate has been increased to 5.15% from 4.65%.

Inflation is projected at 6.7% for the current fiscal year. RBI Governor said that Q1 inflation is expected to be at 7.5% while 7.4% in Q2. In Q3 inflation is seen at 6.2% before falling to 5.8% in Q4. RBI Inflation forecast assumes normal monsoon and crude basket price at $105/barrel. Q1FY23 7.5% inflation is ambitious & I expect it to be closer to 8%. April 2022 inflation was 7.79% and its likely May will be higher.

GDP growth for the current year has been retained at 7.2%. RBI believes Q1 will see GDP grow at 16.2% on a low base while Q2 GDP growth is expected to be at 6.2%, Q3 is seen at 4.1% and Q4 GDP numbers are expected to be at 4%.

As on 3rd June 2022, India’s forex reserves stand at $601.1 bn.

The RBI has announced the linking of credit cards, starting with RuPay credit cards to UPI. This is a positive step & will increase the convenience for users and enhance the scope of digital payments.

The governor has also announced to raise the e-mandate for recurring payments on cards sharply with limit enhanced from Rs.5, 000 to Rs.15, 000 per transaction.

I think the markets have absorbed the 50 bps rate hike & there was no major fall in markets. Even 10 year g-sec is holding on to 7.5%.

We will definitely see an increase in interest rates on both fronts in a couple of days. Both borrowing rates (deposits) & lending rates (loans) are likely to go up by ~50 bps.

We may witness another rate hike, probably of a similar quantum, in the next monetary policy to manage inflationary pressures. Expect repo rate to be between 5.25-5.5% by end of FY23.

The bond yield curve is likely to shift up as markets price in rate action by the RBI. For now we expect the “pricing-in” effect to dominate and push the 10-year yield close to 8% in the next 3 months. Investors should focus on lower duration funds & floating rate funds as they will provide a hedge against increase in interest rates. One can focus on long duration/GILT funds if 10 year g-sec goes above 8%.

RBI Policy Review – No more accommodative

Universal Stagflation

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.

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