RBI MONETARY POLICY AUG 2022
The Reserve Bank of India (RBI) led Monetary Policy Committee on Friday increased the repo rate by 50 basis points for the third consecutive time in a row to 5.40% and the stance to 'withdrawal from accommodative’ in its August policy, as the monetary authority seeks to bring down inflation to its comfort band and in line with policy tightening by key central banks.
However, the MPC also voted unanimously to remain focused on policy stance ‘withdrawal of accommodative’ to ensure that inflation remains within the target going forward, which supporting growth. The RBI delivered a textbook policy announcement today – one that is frontloaded and aggressive in response to inflation that remains high while the growth momentum remains reasonably positive.
Accordingly, the RBI kept its inflation forecast unchanged at 6.7%, sounding caution on uncertainty around inflationary pressures despite the recent moderation in global crude oil and metal prices. The central bank kept its stance unchanged at “withdrawal of accommodation” signalling yet again that the notion of stance is being defined by the liquidity in the system and in turn the overnight rate.
Unlike previous policies, the central bank also focussed on the resilience of external balances implicitly communicating its preference for not just a less volatile rupee but also perhaps some resistance towards very sharp depreciated levels of the rupee. We expect the RBI to continue with its rate hikes in the upcoming policies taking rates up to 5.75% by the end of the year.
The bond market rally seen over the last few days is likely to reverse and we expect the 10-year paper to trade closer to 7.3-7.4% by the end of the quarter as markets reprice in RBI action and the supply of both SDL and central government bonds this year.
Friday’s rate hike, although aimed at inflation, also partly addresses spillover risks from an aggressive stance of the US Federal Reserve and other systemically important central banks. The Fed is unlikely to change its position till it sees a decisive decline in inflation. It remains vigilant of financial market volatility despite the recent relief in some segments.
We retain our growth and inflation outlook for this fiscal at 7.3% and 6.8%, respectively, and expect the MPC to raise the repo rate by another 25 bps during its September review meeting. Beyond that, actions will be guided by incoming data.