Economy: RBI MPC: normalization by stealth to continue - Kotak

RBI MPC: normalization by stealth to continue. The MPC, as expected, kept its policy rate and stance unchanged with a reasonably dovish bias given downside risks to growth. The headline FY2022 GDP and inflation readings were kept unchanged. We expect the RBI to manage VRRRs across tenors in order to shift the operating target rate closer to the repo rate. We retain our base case of 20 bps hike in reverse repo in the February 2022 meeting.

Status quo on MPC decisions; wary of global risks to domestic growth

The MPC unanimously kept the repo rate unchanged at 4% along with accommodative stance with the same forward guidance on the stance. The MPC noted the global risks emanating from (1) surge of infections and emergence of the Omicron variant, (2) persistence of supply-chain disruptions, (3) elevated energy and commodity prices, and (4) possibility of a quicker-than-expected taper by Fed. It observed that while domestic recovery was improving, activity was yet to reach pre-pandemic levels, adding that growth would have to be "assiduously nurtured by conducive policy settings" till it becomes self-sustaining.

The RBI also continued to rebalance liquidity conditions in a non-disruptive manner. The RBI has enhanced the 14-day VRRR auction amounts on a fortnightly basis (Rs6.5 tn on December 17 and to Rs7.5 tn on December 31). Notably, from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route.

FY2022 growth and inflation projections unchanged

The MPC retained its FY2022 CPI inflation projection at 5.3% (Kotak: 5.4%) noting that (1) the flare-up in vegetable prices due to heavy rains is likely to reverse with the winter arrivals, and (2) supply-side interventions by the government continue to restrain the pass-through of elevated international edible oil price to domestic retail inflation. On the other hand, cost-push pressures from high industrial raw material price, transportation costs and global supply-chain bottlenecks continue to impinge on core inflation.

On the growth front, the MPC retained its FY2022 real GDP growth projection at 9.5% (Kotak: 9.5%) noting the downside risks from (1) volatile commodity prices, (2) persisting supply-side disruptions, (3) new mutations of the virus, and (4) potential global financial market volatility. However, the RBI remains optimistic on (1) rural demand, (2) increase in contact-intensive activities and pent-up demand, (3) the government's infrastructure push and widening of the PLI scheme, (4) recovering capacity utilization, and (5) benign liquidity and financial conditions.

Liquidity normalization remains the key highlight

The tone has been adequately dovish with the MPC highlighting that their overarching objective remains pro-growth for now even though price stability remains a concern. The RBI stays cautious on growth in the near term while expecting a relatively strong growth path in 1HFY23. As expected, the highlight of the policy remained on liquidity normalization measures. The RBI has very finely signaled its intention of more aggressive liquidity normalization from January 2022 onwards. The RBI has committed to shift most of the liquidity management through the auction route from the next month and has also refrained from committing to any tenor. We expect the RBI to focus on various tenors' VRRR auctions from January 2022, gradually pushing the operative target rate towards the repo rate. We pencil in a reverse repo rate hike of 20 bps in the February policy.

Source : Equity Bulls

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Economy RBIMPC Kotak