By end of October policy, the policy repo rate stands at 5.90%. While the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the Bank Rate to 6.15%. MPC remains focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
RBI began hiking the repo rate in May 2022 due to inflationary pressure. The case has been the same globally pushing major central banks to take an aggressive approach to their monetary policy. So far this fiscal, RBI has hiked the repo rate by four consecutive policies by 1.9%. The central bank has hiked the repo rate by 50 basis points three times in a row currently. If another 50 basis points hike is on the cards during the December policy, then this would be RBI's fourth hike of the same quantum.
RBI's medium-term target for CPI inflation is 4% within a band of +/- 2%. This means RBI's upper tolerance limit for CPI is 6%. Inflation has stayed above RBI's upper tolerance limit for the tenth consecutive month this year. The last time inflation was around RBI's tolerance limit of 6% was in January 2022.
In October month which is the latest print of CPI, the inflation eased to 6.77% on the back of slower rises in food prices and a strong base effect. This is far better than a five-month high of 7.41% in September 2022.
In its Ecoscope report, Motilal Oswal highlighted that real GDP and GVA witnessed a growth of 6.3% and 5.6% in Q2 of FY23 --- which was lower than their estimates. Further, the growth was also slower than GDP growth of 13.5% and GVA of 12.7% in Q1FY23; and 8.4% and 8.3% growth in 2QFY22. Nominal GDP and GVA growth came in at 16.2% in Q2FY23 versus 26.7% and 28.6% in 1QFY23.
According to Motilal, the details of real GDP suggest that private consumption grew 9.7% YoY in 2QFY23, contributing 5.5pp to overall GDP growth. On the contrary, government consumption contracted by 4.4% YoY in 2QFY23, contributing negatively (-0.4pp) to GDP growth. Additionally, real investments grew 9.2% YoY in 2QFY23, leading to a 3.2pp contribution to real GDP growth. While exports grew 11.5% YoY in 2QFY23, imports grew 25.4% YoY. This led to the external sector contributing -4.3pp. Discrepancies too contributed 3.3pp to overall real GDP growth in 2QFY23.
Further, the stock brokerage's data revealed that implied domestic savings stood at 26.2% of GDP in the first half of FY23; while investments came in at 31.8% of GDP and are similar to the levels recorded in H1 of FY22. Notably, the quarterly print on net exports suggests that implied domestic savings dropped to a 19-year low of GDP in 1HFY23.
That being said, Motilal's note added, a sharp contraction in the manufacturing sector was a big surprise in the 2QFY23 data. Moreover, high inflation seems to have impacted domestic savings in 1HFY23.
Going forward, Motilal expects real GDP growth of 4.5% YoY in 2HFY23, leading to an FY23 growth of ~7% yoy. Thereby, the note added, "As to its likely influence on RBI’s monetary policy decision on 7th Dec’22, we do not think that it will cause any change. Although the market consensus is on a 35bp rate hike in Dec’22, we believe that a 50bp hike cannot be ruled out."
In the November bulletin, RBI stated that domestic inflation remains elevated. It added, "We are closely monitoring the inflation trends as well as the effect of our past actions. In our view, price stability, sustained growth, and financial stability need not be mutually exclusive."
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