EcoFlash - RBI Policy - Hikes inflation and cuts growth projection; Retains accommodative stance

Mr. Amnish Aggarwal, Director - Research at Prabhudas Lilladher

RBI has maintained repo and reverse repo rates along with an accommodative monetary policy to support growth in an uncertain environment of rising inflation and crude prices, geopolitical tensions and a resurgence of Covid in China. Taking a cautious stance, RBI cut its GDP projection for FY23 from 7.8% to 7.2% and hiked inflation from 4.5% to 5.7% led by Q1 at 6.3% and H2 at 5.4-5.1%. RBI's stance seems to change mainly due to rising inflation and global uncertainties even as we expect an uptick in rural income from high Agri commodity prices and gradual demand revival in coming months.

• MPC keep the policy repo rate unchanged at 4%
• Continue with an accommodative stance to support growth in an uncertain environment
• MSF at 4.25% while the Reverse repo rate is hiked by 50bps to 3.35%
• Restore LAF corridor to 50bps i.e. pre-covid levels. Introduced Standing Deposit Facility (SDF) as LAF base at 3.75%.
• The expected positive effects of the omicron waning off have been jeopardized by the global geo-political tensions.
• The Russia-Ukraine crisis has disrupted the global commodity market, mainly, crude oil, aluminum, palladium, wheat, corn, edible oil etc
• Rising risk aversion towards emerging markets has led to outflow of funds and weakened the currency
• Global supply chain disruption owing to geo-political tensions and resurgence in covid in some countries will run the risk of input cost pressures
• Real GDP growth for FY 22-23 cut to 7.2% from 7.8% with Q1 at 16.2%, Q2 6.2%, Q3 at 4.1% and Q4 at 4% assuming crude oil at $100/barrel in 2022-23
• Sharp increase in domestic fuel prices will increase input cost across manufacturing, agriculture and services
• Under the above circumstances and an assumption of normal monsoon, CPI is projected higher at 5.7% from 4.5% in FY22-23 with Q1 at 6.3%, Q2 at 5%, Q3 at 5.4% and Q4 at 5.1%

Source : Equity Bulls

Keywords

EcoFlash RBIPolicy PrabhudasLilladher