RBI MPC Preview Sep'22 Update: 50 Bps with a Neutral Stance Expected

27 Sep 2022

Citi Analysts expect a 50bps repo rate hike to 5.9% and a change in stance to “Neutral” as their base case in the upcoming Sep MPC. They expect RBI to maintain the inflation view of 6.7% with risk titled to the upside (on account of rising food prices). Accounting for repeated supply-side shocks and an increasingly hawkish global central banks, MPC may take the policy rates closer to neutral, before turning more data dependent. Whether it will be a 35bps or a 50bps rate hike will be a function of members differing on the efficacy of front-loaded pace of tightening. Key Points appended below:

• 1. A 50bps hike more likely in September : Why?
• a. Supply-side shocks on food prices continue to pose upside risks to near-term inflation prints. Deficient rainfall in some parts of the country is a threat to rising  prices of rice and pulses, while excess rainfall in others may cause vegetable prices (particularly tomatoes) to move higher again. This will be the first YoY drop in food grain production in seven years.

• b. In June 2019, when the policy stance was changed from “neutral” to “accommodative”, repo rate was reduced from 6.0% to 5.75%. Compared to this historical pattern of defining the neutral rate, a 50bps repo rate hike in the September policy to bring repo rates to 5.9% can be thought of as bringing rates in neutral zone. if average inflation for FY24 is forecast to be around 5%, then the 5.9% repo rate will be consistent with the 80 -100bps real neutral rate considered appropriate by the RBI.
• c. RBI Bulletin highlights need for front-loading of rate hikes to reduce the medium-term growth sacrifice as well as importance of achieving the inflation target of 4%.Global central bank hawkishness could nudge towards front-loading.
• d. Minor GDP forecast adjustment by RBI to FY23 GDP growth forecast of 7.2% likely since Q1 GDP print came in much lower than expectation.Banking system surplus liquidity has now been firmly below the 1% of Net Demand and Time Liabilities (NDTL) mark. No expectation of RBI to announce any sustained liquidity infusing measure (OMO purchase/reversal of CRR hike/FX swaps) in the September policy.
• 2. What can prompt a 35bps repo rate hike?
• Sep MPC could be a split decision with some members differing on efficacy of front-loaded pace of tightening and Financial conditions in restrictive territory, close to 2018 highs.




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