What is your first reaction to the policy? Is it exactly as you thought or was there some difference as far as the stance is concerned because on rate action, almost everybody was unanimous?
The policy was exactly in line with expectations. They delivered a 50 bps rate hike as expected. The stance was also unchanged as withdrawal of accommodation with no change in inflation projections and just a slight tinkering in one of the quarter’s projections. Interestingly, real GDP growth was adjusted lower to 7% but UBS forecast has been 7% for the last five months. I would say it is largely on expected lines.
Did you see some contradiction in a central bank which lowers the growth estimates, keeps inflation estimates unchanged and yet keeps the stance more or less focussed on inflation rather than giving any kind of support growth? Is there a slight contradiction between action and commentary?
I would not really say that. When the RBI came out with the growth projections in the last policy, they were at around 16% growth in Q1, whereas the actual growth was 13.5%. All they have done is just mathematically adjust the numbers lower to take into account a weaker than expected first quarter. But very clearly, what is coming out from the RBI policy is that obviously inflation is a priority and they do take into account a very hawkish central bank across the world and that can have an impact on RBI’s policy and even on the growth outlook going forward.
For example, in our base case, we are expecting more rate hikes to continue. We are expecting RBI to take the repo rate to 6.25% by the December policy and this is taking into account our US team forecast that the Fed rate peaks at 4.25-4.5% by the end of 2022.
But yes, if there is a higher than expected Fed’s terminal rate pricing and RBI keeps on focussing upon taking inflation down to 4%, even at the cost of restraining domestic demand, the forecast will definitely get tweaked.
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