The MPC voted to raise the repo rate by 35 bps taking it to 6.25% as expected by majority of market participants, while remaining focused on withdrawal of accommodation (with 4-2 majority).
In the backdrop of signs of slight moderation in inflation owing to falling commodity prices amidst global growth slowdown, the full impact of past rate hikes and liquidity tightening measures is yet to be seen. Commodity prices have also come off and fall in crude prices is also encouraging. However, a sticky core inflation and higher cereal prices & increasing food inflation has kept RBI cautious.
Headwinds to the domestic economy would emanate from slowdown/recession spilling over and lagged impact of monetary policy tightening. RBI lowered the real GDP projection marginally from 7% to 6.8% for FY23, while CPI inflation forecast remained unchanged at 6.7% for FY23.
Overall, the MPC statement was less dovish than expected given that there was no change in stance. However some MPC members have expressed their view to await transmission to avoid overdoing hikes. Reaction to the absence of change in stance is seen in bond yields, 10-year Gsec yields moved up 7bps to 7.30%. We expect that terminal policy rate would be 6.5% with the last 25 bps rate hike likely delivered in the February policy depending on direction of commodity prices and outcome of Union Budget. |
