RBI monetary policy Feb 2023

13 Feb 2023

In Feb 2023 the RBI MPC hiked repo rate by 25 BPS, keeping the “withdrawal of accommodation” stance unchanged. Given the RBI's forecast that headline CPI may not likely fall below 5% for the entire fiscal year 2024(higher than Citi analysts' forecast), Citi's base case expectation is another 25-basis point rate hike in April 2023. Hawkish hike by the RBI may drive further uptick in yields, on a flatter curve; 10y bond yields likely capped around 7.40-45%.

• 1. Growth and Inflation: The RBI's real GDP growth forecast for FY24 is significantly higher than Citi's estimate and the market consensus. The RBI forecasts real GDP growth of 6.4% YoY for FY24, compared to Citi's forecast of 5.9% and consensus of 6%. Except for some concerns about weakening external demand, the governors' comments on growth remained upbeat and constructive. RBI's forecast that headline CPI may not likely fall below 5% for the entire fiscal year 2024, The full year FY inflation forecast by RBI is at 5.3% VS Citi’s view of 4.9% Citi's base case expectation is another 25-basis point rate hike in April 2023.
   


• 2. RBI’s cautious view on inflation could be linked to the following factors:

• a. Volatile vegetable prices have led to the recent fall in inflation. This trend may reverse this summer, causing the RBI to be cautious.
• b. More bullish growth forecasts feed into the RBI’s view on inflation.
• c. The stickiness of core inflation and the resilience of growth will almost certainly lead to demand-side inflationary pressures. The deputy governor alluded to "excess demand" pressure with reference to core inflation.

• 3. Do we expect More Rate Hikes:

• a. Earlier View: Citi analysts predicted that the RBI would pause after a 25-basis point hike in February. This assessment was based on (a) real rates reaching 150 bps on a 5% CPI assumption for FY24. (b) Monetary policy acts with lag, and the RBI would have already done a front-loaded 250 bps hike. (c) External MPC members were highlighting the risk of excessive tightening. (d) Inflation in 1HFY24 was expected to average slightly below 5%
• b. Revised View: Citi analysts added another 25-basis point hike in April 2023 to our base case after forecasting the growth-inflation profile aggressively and listening to the MPC's cautious commentary. This revised assessment is based on: (a) the MPC seems willing to keep real rates well above neutral levels to break the persistence of core inflation; (b) the RBI has termed both rates and liquidity as still "accommodative" and retained its withdrawal of that stance. (c) The RBI’s inflation projection does not indicate a return to 4% in any of the quarters of FY24. (d) The majority of the MPC remains tilted towards inflation as the primary concern and is comfortable with split decisions.

Summary: Bond yields are projected to behave better in the last weeks of the fiscal year, with positive supply dynamics and a budget for FY24 that does not succumb to the temptation to engage in populist spending. Citi analysts anticipate a limit zone of 7.40–45% for 10-year bond rates, with yields progressively drifting near 7% in the next few months.