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Gears shifting for RBI, sounds Hawkish

ICICI Securities 11 Apr 2022

What’s Buzzing:

In its April Monetary policy review, the RBI maintained status quo on key rates and maintained accommodative stance. However, the focus has now shifted to withdrawal of accommodation to ensure inflation is within targeted range. Inflation target has been raised upwards with the tone becoming hawkish incrementally.

Context:

The RBI maintained its repo rate at 4.0%, reverse repo rate at 3.35% and MSF at 4.25% with all MPC members unanimously voting on status quo on rates. They have also decided unanimously to maintain an 'accommodative' stance, but with focus on withdrawal, liquidity expected to become tighter and bond markets expected to take the same negatively.

Our Perspective:

The bond market initial reaction to the policy was sharply negative with benchmark 10-year G-Sec yield trading at 7.05%, higher by 15 bps. The Standing Deposit Facility (SDF) at 3.75% (25 bps lower than repo rate) as the floor of the LAF corridor has indirectly, hiked reverse repo rate by 40 bps as the overnight rates will now be pegged at 3.75%. The other major negative implication from the monetary policy was the sharp upward revision in inflation forecast by around 80-140 bps. CPI inflation for FY23 is estimated at 5.7% compared to 4.5% in February policy meeting. the tone of the RBI Governor sounds hawkish citing that the priority has changed from growth to inflation in this policy meeting. While the focus of the RBI remains on growth, its citing that the expected positive benefits from the ebbing omicron variant have been offset by the sharp escalation in geopolitical tensions. Effectively, this policy marks the rate hike of lower end of the LAF corridor (now SDF instead of reverse repo) at 3.75% and the next policy meeting may change the stance to "neutral" from “accommodative” and the MPC meeting following that may mark the first repo rate hike of the current rate cycle.

 

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