The Signal: RBI’s Nimble Stance

The Reserve Bank of India has hiked the repo rate by 50 bps and maintained the stance of withdrawal of accommodation. It was in line with the market expectations to ensure that inflation remains within the target range.

Policy Rates:

Five out of six members of the Monetary Policy Committee decided to increase the policy rate by 50 bps to 5.9 per cent. RBI has done a total rate hike of 190 bps since May’22, including the recent rate hike of 50 bps.

GDP projections:

Real GDP for Q1FY23 grew by 13.5 per cent, surpassing robust growth in private consumption and investment demand. The manufacturing sector’s capacity has improved and remained at the highest level in the last three years.

However, on the other hand, headwinds from geopolitical tensions, tightening global financial conditions and slowing external demand pose downside risks to net exports and India’s GDP outlook. Merchandise exports have moderated amid headwinds from global uncertainty. As a result, GDP growth projections for FY22-23 were trimmed down to 7 per cent from the earlier 7.2 per cent.

We expect GDP growth to take a backseat in Q3FY23 as the base effect goes out of the picture.

Inflation projections:

Even though the inflation projections for FY23 remain unchanged, RBI remained vigilant on the uncertainty around inflationary pressures.

On faster depletion of forex reserves:

India’s foreign exchange reserves have fallen by three trillion rupees from the peak of October 2021; however, RBI has reiterated the resilience of India’s external balances & even currency depreciation compared to peers.

The RBI has emphasised that its focus would be on maintaining investor confidence and anchoring expectations signalling further foreign exchange interventions to defend the rupee from any extreme volatility through the forex kitty as it remains strong compared to the 2013 taper tantrum.

On banking liquidity deficit

Liquidity in the banking system has gone into deficit mode after remaining surplus for almost 40 months. As a result, the call money rates have increased over and above the repo rate. Interbank call money rates had also risen above the repo rate.

In the monetary policy meeting, RBI said it would continue undertaking two-way operations to manage liquidity conditions. The RBI has decided to merge the 28-day VRRR auction with the 14-day auction. RBI expects system liquidity to increase as government expenditure picks up on high GST and direct tax collections.

We expect liquidity to be in surplus in Q3, supported by RBI’s proposed two-way operations.

Investor Takeaways

While we remain hopeful that the variables turn in favour, we also acknowledge that the wind is against us. We expect the rate hike cycle to continue for a little longer with quantum depending on the pace at which externalities revert to a range that is at least closer to normal.

In light of developments in policy rates and sovereign and corporate bond yields, fixed-income investors can invest in funds with an effective maturity of 3 to 5 years following a roll-down strategy. A mix of PSU and SDL-backed papers offer strong quality to the mix.

Markets this week

• Markets ended the week on a negative note.
• Markets gained on Friday as the Reserve Bank of India has raised the repo rate within the street expectation of 50 basis points.
• Nifty Pharma and Nifty IT index were up during the week with 3.0 percent and 1.5 percent gains respectively.
• Foreign institutional investors sold equity shares worth Rs. 15,862 crores where as DIIs sold Rs. 14,120 crore worth of equity shares.
• US Dollar index surpassed alarming levels during the week, which may have negative impact on equity markets.

Weekly Leaderboard:

Stocks that made the news this week:

• Godrej Consumer rallied 1.5 percent during the week as the company organized a conference call led by Business head to discuss its performance and strategy for the GAUM region.
• Increasing natural gas prices is a major negative for tile producing companies such as Kajaria Ceramics, Somany Ceramics, Exxaro Tiles and Orient Bell. As per some estimates gas cost can be around 60% of total cost of production for ceramic companies.
• HeroMotoCorp share price declined during the week as the company is collaborating with Zero Motorcyles by investing Rs. 490 crores to develop electric motorcycles. Hero Motocorp already has a stake of 35 percent in electric two-wheeler segment.
• Bharti Airtel’s promoter Bharti Telecom Ltd purchased its own stake from Singapore Telecommunication Ltd subsidiary Pastel Ltd who divested 1.59% in the company.