RBI MPC - Acuité Ratings & Research comments on RBI MPC - Apr'23

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

RBI MPC has taken a pause on the interest rates in the Apr-23 MPC contrary to our expectations but has termed it as 'temporary' and retained its stance at 'withdrawal of accommodation'. In our opinion, this has been primarily induced by the turbulence in the global banking sector brought about by the failures of a few regional banks in US and the potential contagion risks in other parts of the world. In other words, it is "wait and watch" policy being adopted for now not only on the global environment but also on the domestic inflation print. What has also helped in taking a pause decision for now is the moderation in the hawkish stance from Fed, weakness in the US dollar and the recent improvement in India's current account position.

Nevertheless, the communication from RBI has highlighted that the war with inflation is not yet over and the MPC will be ready to take any further hike in rates if the concerns on inflation increase further. RBI has not made any significant modifications to its existing forecasts on growth (6.5%) and retail inflation (5.2%) for FY24. In our opinion, the likelihood of a continued pause and a pivot to lower rates in the current year is still uncertain. RBI has highlighted the potential risks from food inflation given the uncertainty on the current year's monsoon along with a significant likelihood of the core inflation levels above 6% in the near term due to resilient domestic demand.

The pause in the rate cycle, however, will be positive for the bond markets and government borrowings. Despite a higher issuance of gsecs in H1FY24, we don't expect the 10 yr g-sec yields to move appreciably above the current levels. RBI will also ensure that the liquidity in the system remains either neutral or slightly in surplus."

Source : Equity Bulls

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