Given the specter of higher inflation, the Monetary Policy Committee (MPC) presciently raised the repo rate by 40 basis points (bps) at an off-cycle meeting in May. He decided to remain accommodative while focusing on withdrawing accommodative measures to ensure inflation remains on target while supporting growth. It also increased the cash reserve ratio (CRR) by 50 basis points to 4.50% to absorb systemic excess liquidity of around Rs 87,000 crore.
With the June 2022 policy meeting starting on Monday, we expect another 40 basis point hike in the repo rate, an upward revision to the FY23 inflation forecast and no change in the growth forecast or the CRR.
CPI inflation hit a 95-month high of 7.8% in April 2022, with a clear broad base of inflationary pressures. Despite the measures taken by the Indian government, such as cutting excise duties on fuels, banning wheat exports, etc., we expect CPI inflation to average around 6 .5% in FY23, well above the April 2022 MPC projection of 5.7%. world commodity prices and the expected strengthening of domestic demand for services.
As a result, an upward revision to the MPC inflation forecast for FY23 is inevitable. Additionally, monthly CPI inflation prints are highly likely to hold north of 6%, the upper bound of the MPC’s medium-term forecast range of 2-6. %, for most months in fiscal year 23.
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On the growth front, India’s GDP expansion pace is expected to slow to 4.1% from 5.4% in the third quarter of FY22. contacts and better visibility of the incomes of the households that depend on them, as well as some signs of an uneven recovery in investment spending will support the growth momentum in FY23.
Nonetheless, corporate margins are likely to be squeezed, amid incomplete pass-through of input price pressures, while higher inflation would limit demand growth. In addition, external demand is expected to weaken amid ongoing geopolitical tensions, high commodity prices and policy tightening in advanced economies.
Following real GDP growth of 8.7% in FY22, off the subdued base of the pandemic-hit FY21, we maintain our forecast of 7.2% expansion in FY22. fiscal year 23. This is in line with the MPC’s April 2022 projections.
With average CPI inflation for FY23 expected to be well above the upper bound of the MPC’s medium-term forecast range, we expect the MPC to raise the repo rate by 40 basis points when of the June 2022 revision. This should be followed by further hikes of 35 basis points each in the August 2022 and September 2022 revisions, bringing the benchmark policy rate to 5.5%. After that, we expect a pause to assess the underlying economic growth momentum exhibited by the Indian economy.
Rising global interest rates and domestic monetary tightening will cause government bond yields to tighten over the coming months. We suspect that the Government of India’s 10-year security yield (G-sec) will test 8.0% by the end of September 2022, from around 7.45% currently.
Additionally, bank deposit rates have started to rise, following last month’s spike in repos. If small savings rates are reset at the end of this month, it could prevent the Indian government’s market borrowing program from having to be significantly expanded, amid some fears of a slight fiscal slippage, preventing thus a faster rise in G-sec yields.
—Aditi Nayar is Chief Economist, ICRA. Opinions expressed are personal
(Edited by : Ajay Vaishnav)