The RBI, in line Acuité's expectations, frontloaded its policy normalization path by hiking the repo rate by 50 bps taking it to 4.9%. Consequently, the standing deposit facility (SDF) rate also stands adjusted to 4.65%; and the marginal standing facility (MSF) rate to 5.15%. Acuité believes RBI to take further action on the policy rate that may be warranted based on the evolving inflation-growth dynamics.
RBI has revised CPI forecasts which is projected to persist above the upper tolerance threshold of 6% in the first three quarters of FY23. With an expectation of normal monsoon and assumption of crude oil price averaging at USD 105 pb in FY23, it now expected that inflation in FY23 to be sharply higher at 6.7% in FY23 from 5.5% in FY22. As per Acuité's inflation model, in the base case assumption, headline CPI inflation is likely to average at 6.5% in FY23.
Says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research "With the MPC clearly decisive in addressing inflation risks, we expect the RBI to raise repo rates by a cumulative 150-200 bps in FY23 taking the repo rate in the range of 5.5%-6.0% in FY23, well above the pre-pandemic level of 5.15%. Clearly, the need for further front loading of rate hikes has been highlighted by RBI through its forecasts for quarterly CPI inflation which is set to remain above 6.0% for consecutive 4 quarters. The front loading of rate action will also continue to be in sync with the aggressive monetary policy normalization in several countries, led by the US. Nevertheless, the extent of the subsequent hikes will depend on the inflation print over the next few months, the performance of the monsoon and its impact on the food prices as also on the effectiveness of the price control measures taken by the government. The rate hikes imply further and higher rate increases in consumer loans as well as deposit rates. By Dec-22, we expect retail home loan and bank deposit rates across all categories to rise by at least 100 bps from the current levels, translating to an increase of at least 15% for home loans EMIs. We expect the central bank to rely on various monetary tools to support yields and ensure an orderly completion of government's record high borrowing program in FY23."