Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research
"On expected lines, RBI MPC has raised the repo rate for the fourth time in the current fiscal, taking the aggregate hike to 190 bps. Importantly, the central bank has continued to be in the "withdrawal of accommodation" mode, reflecting the increased possibility of a further rate hike in the Dec'22 of MPC. Clearly, the key concern at the current juncture is the persistent and the sharp monetary tightening by the major central banks which the governor referred to as the "next storm" after the pandemic and the war in Ukraine. Therefore, the likelihood of a terminal or neutral rate of 6.5% and even above over the next 2 quarters has clearly increased.
On the growth front, RBI appears to be fairly confident on the resilience of the domestic economy despite the global headwinds. While the GDP forecast for FY23 has been slightly moderated to 7.0%, there is a comfort emerging from the recovery in private consumption and the improved performance of the monsoon. This will help the central bank to continue on its hawkish stance till the inflation declines below 6.0%. As regards the headline inflation, MPC has maintained the existing forecast of 6.7% given the upside risks on food inflation and the likely rigidity of core inflation given the increasing consumption demand. The possibility of an additional hike in Q3FY23 is also borne out of RBI's expectation that inflation will not come down in a hurry, given that they have projected an average CPI print of 6.5% in the next quarter, well above the upper MPC band.
To ensure that the monetary transmission is efficient in the current upcycle, RBI has also reduced the surplus liquidity in the system significantly in Q2 and this has also been partly driven by the pickup in credit growth. While this has been reflected in the short-term interest rates, bank deposit rates have lacked the upward momentum so far. However, we believe that the large 6%+ differential between the increased credit and deposit growth is clearly unsustainable and hence, we expect a significant hike in deposit rates by banks up to 50-150 bps in H2FY23."