India: RBI raised rates further – UOB

UOB Group’s Head of Research Suan Teck Kin, CFA, reviews the latest interest rate decision by the RBI.

Key Takeaways

“The Reserve Bank of India (RBI) lifted its benchmark repo rate by 50 bps to 5.90% from 5.40% in its Sep monetary policy meeting in a 5-1 decision. The move was in line with majority of Bloomberg survey but exceeded our expectation of 25bps move as RBI focuses on keeping inflation within the target going forward, while supporting growth. This is the third straight 50-bps hike for the RBI, underlining its concerns over the inflation trajectory so far this year.”

“The Monetary Policy Committee (MPC) noted that despite a challenging global environment, domestic aggregate supply conditions are improving, while urban consumption is being lifted by discretionary spending ahead of the festival season and rural demand is gradually improving.”

“The MPC said elevated imported inflation pressures remain an upside risk for the future trajectory of inflation, amplified by the continuing appreciation of the USD. The outlook for crude oil prices is highly uncertain and tethered to geopolitical developments, with attendant concerns relating to both supply and demand. The MPC lowered its forecasts for average crude oil price (Indian basket) to US$100/barrel (from previous forecast of US$105), and kept its inflation forecast of 6.7% in 202223 (which was last raised from previous forecast of 5.7% at the Jun MPC), with 2Q at 7.1%; 3Q at 6.5%; and 4Q at 5.8%, and risks are evenly balanced. CPI inflation for 1Q FY2023-24 is projected at 5.0%.”

“Nevertheless, GDP growth forecast for 2022-23 is trimmed to 7.0% (in line with our projection), from 7.2% (after having downgraded it from 7.8% in Apr). RBI noted headwinds from global forces - protracted geopolitical tensions, rising global financial market volatility, tightening global financial conditions; and global recession risks. The MPC highlighted headwinds from geopolitical tensions, tightening global financial conditions and the slowing external demand pose downside risks to net exports and hence to India’s GDP outlook.”

“With the policy priority on containing inflationary pressures from second-round effects of supply side shocks and anchoring long term inflation expectations, there is still room for RBI’s rate hike cycle. After kicking off with the surprise unscheduled 40bps move on 4 May and the consecutive 50bps hikes in Jun, Aug and Sep MPC, we think that the RBI will hike further to rein in inflation while keeping a close watch on downside risks to growth. In the two remaining MPCs in FY2022-23, we anticipate the RBI raising the repo rate to 6.50% to match the level last seen in Jan 2019, just before RBI entered its accommodative phase.”