Chief Analytical Officer, Mr. Suman Chowdhury
With RBI's focus on taming inflation, another 35bps rate hike possible in Dec-22
The US Federal Reserve raised interest rates by 75 bps for the third consecutive time (a cumulative 300 bps between March to September) taking the policy rate to 3.0-3.25% with a view to combat the 40-year high inflation and tighten the current labour market that is causing a wage-price spiral. The dot-plot was also much more hawkish in Sep-22 that showed a 4.4% median Fed Funds rate by Dec-22 (3.4% in Jun-22) and a terminal Fed Funds rate of 4.6% next year(3.8% in Jun-22)
From the domestic perspective, the overall economy continues to remain resilient with high-frequency indicators displaying incremental strength, well into Q2 FY23, as reflected in the Acuité Macroeconomic Performance index (AMEP index) that has continued to record a double-digit growth rate for the fifth consecutive month of 12.4% YoY in Aug-22 vs 20.0% in Jul-22 with services leading recovery aided by non-dissipating pent-up demand (especially in sectors such as tourism, hospitality), normalising personal mobility and expansive vaccination coverage.
On the other hand, the uptrend in inflation has propelled the RBI to hike rates by 140 bps in 2022 so far, taking the repo rate to the pre-pandemic level of 5.40% currently.
Acuité expects one more rate hike of 50 bps in the upcoming policy review. Subsequently, Acuité expects the RBI to begin dialing down the pace of interest rates hike with a likelihood of a modest 30-35 bps rate hike in the Dec-22 policy review and pause thereafter. However, this view is subject to the evolving inflation trajectory and any other upside surprises from an inflation perspective.
Says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research "The narrative for the upcoming MPC meet will not just be driven by the concerns on the inflationary trajectory but the sharply rising interest rates in the developed economies that continue to have an impact on the INR and India's foreign exchange reserves. Given the expected trajectory of interest rates particularly in the US, the likelihood of another 50 bps hike by the MPC in the Sep-22 meet has clearly increased. With higher demand for credit in the banking system, the pace of monetary transmission of higher interest rates is also likely to pick up in H2FY23. This will also reflect a quicker uptick in bank deposit rates."