RBI prioritizes inflation over growth, Acuité expects inflation to average at 5.9% in FY23 - MPC review - April'22

In the first monetary policy review for the new fiscal year, RBI has, rather a little unexpectedly, significantly altered the narrative prevailing over the last two years and brought in a hawkish tone to signal an exit from its ultra-accommodative policy, given the visibly increasing risks from the inflationary headwinds that has been aggravated by the ongoing Russia-Ukraine conflict.

While RBI maintained status quo on the repo rate at 4.0%, it rephrased its stance stating that "the MPC has decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth". In another interesting move, while the fixed reverse repo rate has been kept unchanged at 3.35%, the RBI has introduced the 'Standing Deposit Facility'(SDF) at 3.75%, which will now effectively serve as the floor for the LAF corridor. With the existing MSF rate at 4.25%, the RBI has restored the LAF corridor to 50 bps. The introduction of SDF is expected to increase the flexibility of the RBI to absorb liquidity, as its not constrained by the availability of collateral.

Says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research "The introduction of SDF at 3.75%, in essence tantamount to an increase in the reverse repo rate by 40 bps since the latter tool is likely to get defunct. In our opinion, the MPC statement indicate the impending rise in repo rate over the next 1-2 policy meetings and may trigger a moderate hike in banks' deposit rates that have already seen an upward revision of 10-15 bps from Feb-22."

Given significant layers of uncertainties injected due to the raging conflicts between Russia and Ukraine, the RBI also revised its growth forecast downwards to 7.2% for FY23 from 7.8% expected in the previous policy meeting. Nevertheless, RBI expects the ebbing of Covid risks, robust vaccination coverage, prospects of robust rabi output, pick-up in contact intensive services sector along with government's thrust on infrastructure segment to support growth momentum in FY23.

RBI has now revised its FY23 inflation forecast upwards from 4.5% in Feb-22 policy meeting to 5.7%, on the assumption of crude oil averaging at USD 100 pb in FY23. We, however, attach a mild upward bias to RBI's inflation forecast given the low likelihood of any material cool down in crude oil and other commodity prices within a short period. Accordingly, we expect inflation to average at 5.9% in FY23.

Link to the report

Source : Equity Bulls

Keywords

RBI MPCReview April2022 AcuiteRatings