RBI Policy Update

03 Oct 2022

In line with the recent trend of tightening rates by global central banks, the RBI announced the fourth consecutive rate hike in a row on 30th Sep’22 amid surging inflation and slowing global growth. The MPC’s rate decision and macro forecast were on expected lines. The policy stance and aggressive global monetary tightening has led Citi analysts to revise the peak repo rate forecast to 6.5% (vs 6.0% earlier). They expect a likely 35bps hike in December and 25bps hike in February 2023. With RBI not concerned on near term liquidity tightness, the monetary policy could pivot in 2H2023 accounting for a drop in the CPI (below 6%).

Strategy: The Bond yields are likely to remain orderly with the 10y yields likely to gradually drift to 7.50%. Citi analysts suggest staying long USD INR (expect the spot to push above 83 as the INR catches up with broad USD strength, reflecting the wider financing needs).

Key Announcements:

• a. Repo Rate hiked by 50 basis points to 5.9%
• b. SDF (Standing deposit facility) rate adjusted to 5.65%
• c. MSF (Marginal Standing Facility) and bank rate adjusted to 6.15% from 5.65%
• d. Stance focused on “withdrawal of accommodation” to remain within inflation target
• e. 28-day variable rate reverse repo rate (VRRR) auction merged with 14-day VRRR auction to counter temporary moderation in liquidity
• f. Inflation projection retained at 6.75 for FY23
• g. FY23 GDP growth forecast lowered to 7% from 7.2%

Key Highlights:

• 1. Rate and Stance: The repo rate has been hiked by 50bps (to 5.9%) in the September MPC, with a 5-1 vote where one member of the MPC voted for a 35bps hike rather than 50bps.The MPC decided to retain its stance of “focused on withdrawal of accommodation”. Citi analysts highlight a hawkish bias in the policy statement since connecting the monetary policy stance to the real rate and emphasizing that the RBI has not even reached Neutral stance point to more  rate adjustments in the future. 



• 2. Growth-inflation dynamics: Citi analysts believe that  MPC is focusing more on bringing the headline CPI within the target range to manage inflation expectations (up 50bps in the September household survey) rather than explicitly considering the sources of inflation. The RBI MPR ( monetary policy report) suggests aggregate  demand conditions continued to exert downward pressure on inflation.
• 3. Can there be a rate cut in 2023? Predicting growth-inflation dynamics in an uncertain global backdrop is difficult. Citi analysts expect a monetary policy pivot in 2H2023 as CPI likely drops below 6%.Peak rate could be higher and/or continued for longer if the MPC insists on achieving the 4% CPI target even at the cost of sacrificing growth. RBI’s MPR projection of 5.2% average CPI in FY24 is still higher than the medium-term target of 4%

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