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    Credence Capital - MPC Aug 2022

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    Sandeep Tiwari
    The Reserve Bank of India raised interest rates by 50 basis points to curb high inflation. Inflation has remained above the RBI's target band and is being driven by both supply and demand factors. While economic growth is projected at 7.2% for the current fiscal year, the accommodative monetary policy stance has shifted to focus on restraining inflation expectations. Foreign exchange reserves have declined sharply this year due to interventions to reduce rupee volatility against other currencies.

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    Credence Capital - MPC Aug 2022

    Uploaded by

    Sandeep Tiwari
    17 views1 page
    The Reserve Bank of India raised interest rates by 50 basis points to curb high inflation. Inflation has remained above the RBI's target band and is being driven by both supply and demand factors. While economic growth is projected at 7.2% for the current fiscal year, the accommodative monetary policy stance has shifted to focus on restraining inflation expectations. Foreign exchange reserves have declined sharply this year due to interventions to reduce rupee volatility against other currencies.

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    Credence Capital_MPC Aug 2022

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    The Reserve Bank of India raised interest rates by 50 basis points to curb high inflation. Inflation has remained above the RBI's target band and is being driven by both supply and demand factors. While economic growth is projected at 7.2% for the current fiscal year, the accommodative monetary policy stance has shifted to focus on restraining inflation expectations. Foreign exchange reserves have declined sharply this year due to interventions to reduce rupee volatility against other currencies.

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    Download as PDF, TXT or read online from Scribd
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    17 views1 page

    Credence Capital - MPC Aug 2022

    Uploaded by

    Sandeep Tiwari
    The Reserve Bank of India raised interest rates by 50 basis points to curb high inflation. Inflation has remained above the RBI's target band and is being driven by both supply and demand factors. While economic growth is projected at 7.2% for the current fiscal year, the accommodative monetary policy stance has shifted to focus on restraining inflation expectations. Foreign exchange reserves have declined sharply this year due to interventions to reduce rupee volatility against other currencies.

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    CREDENCE CAPITAL

    (Investment Club of IIM Lucknow)


    Overview: Monetary Policy and Macroeconomic Landscape of India
    Repo Rate: 5.40% (raised by 50 bps)
    SDF: 5.15% *
    MSFR and Bank Rate: 5.65%
    Projections:
    • Inflation: 6.7% (CPI for current fiscal)
    Key Decisions • GDP growth: 7.2% (for current fiscal, real)
    and Rationale Shifting away from the accommodative stance – “No dovish undertone”
    Rationale:
    • Inflation has been consistently above the RBI’s 4%-6% tolerance band; is no more just supply-side driven
    • With the recently zooming figures, it was important to restrain inflation expectations, which would otherwise fuel
    the price rise – a 50 bps hike is significant enough to keep inflation expectations in check
    • As central banks worldwide raise rates, RBI reacting sluggishly would lead to high capital outflow to greener pastures
    • Overall expansion in economic activity: PMI at 55.5 (July); capacity utilisation above long term average, at 75.3%
    • USD appreciating consistently as the Fed raises rates, but the Rupee has held well against other currencies in EMEA
    Macro Insights • The RBI has utilised a significant chunk of forex reserves through interventions to reduce exchange rate volatility
    ▪ Forex reserves dropped from ~ $ 635 billion (Jan ’22) to ~ $ 571 billion (July ’22)
    • Net FDI rose from $ 11.6 billion (Q1 ’21-22) to $ 13.6 billion (Q1 ’22-23); FPI turned positive after fleeing in Q1
    • The vast amounts of surplus liquidity accumulated by banks during the pandemic is now waning as credit growth
    rises in the face of softening deposit growth; it is down from Rs. 6.7 lakh cr. (Apr-May) to Rs. 3.8 lakh cr. (Jun-Jul)
    Liquidity ▪ Credit growth went from 5.4% last year to 14% (as on July 15, 2022)
    Management ▪ Deposit growth has fallen from 11.9% last year to 10% (March 2022)
    • This strain on liquidity led the money market (inter-bank short term loan market) rates to rise above the repo rate
    towards the end of July. To restore normalcy, the RBI conducted 3-day variable repo rate auctions of Rs. 50,000 cr.
    • Fairly broad-based; may recede as alternate supply chains stabilise and on the back of a satisfactory domestic monsoon
    Inflation
    • Core CPI (excluding food and fuel) has been reducing, is typically a lead indicator for the path of the headline CPI too
    PMI: Consistently > 50 (shows economic expansion) Forex reserves have been declining since early 2022

    Trends
    Many components contributing to the elevated CPI Headline CPI tends to follow the trend set by the core

    Market • Bank NIFTY reversed its bullish run (intra-day), closing ~135 points lower than mid-day, when hike was announced
    Reaction • 10 year G-Sec yields rose from an open of 7.1221% to 7.3160 % i.e. a more than 19 bps rise
    For details on other measures announced:
    Articles for https://rbi.org.in/Scripts/Annualpolicy.aspx
    further reading https://www.livemint.com/news/india/rbi-monetary-policy-live-updates-governor-shaktikanta-das-repo-rate-inflation-
    11659669097185.html
    Sources RBI Governor’s Statement, pib.gov.in, trandingeconomics.com

    *from Apr ’22 onwards, SDF has replaced the reverse repo rate as the floor for the LAF corridor
    05-08-22 Overview: Monetary Policy and Macroeconomic Landscape of India Pradnyee Kantak

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