Repo may close at 5% by FY23-end; downgrade in growth projection likely: HSBC India

To combat inflation, the US Federal Reserve has indicated that it will resort to not just rate hikes but also a reduction in the balance sheet.

To understand what it means for the Indian markets, and will it be factored in the upcoming RBI monetary policy, CNBC-TV18 spoke to Hitendra Dave, CEO, HSBC India.

Dave mentioned that the central banks in emerging markets will have to handle several issues in the near-term. He shared that comparatively, the rate hikes will be more rapid in advanced economies. According to him, the RBI will take into account what the Fed does and also other global cues, but ultimately its decision is likely to be based on domestic factors.

Dave believes repo rate will be close to 5 percent by FY23-end.

He said, "My own guess is, by the end of this financial year (FY23), we could be looking at a repo rate close to 5 percent."

India is being sought after globally. Exports are likely to be fueled by growth in developed markets, he said.

"The fact that central banks, specially the US is hiking rates would suggest that the growth there is very strong, so that should boost your export capabilities or your export market a lot more," he mentioned.

"With enough liquidity, with terminal rates at 2.50-3 percent, I still think we will continue to get what we get. If not increase because of developments outside of India, which in India is becoming a much more sought after destination from a de-risking perspective or from attractiveness of the local market perspective. So, if I had to share my thinking, I would say we should not get unduly perturbed, but we obviously shouldn't take our eye off the ball as well," Dave said.

On growth projections, he said that there could be a downgrade. "It will depend on inflation projections. Also along with the inflation projections, which almost universally everyone expects, will be higher than what they projected in February, there could be a potential downgrade to growth projections as well," he said.

"So given that the MPC has been so far more worried about lack of growth entrenchment versus inflation, whether in the midst of this very high uncertain period, they will choose to change the narrative entirely. I think it is 50-50 call but my guess is they will clearly indicate that the tolerance for inflation could test the result to support growth," he added.

Dave highlighted that there will be wobbles in the financial market. He explained that the structure of India’s story will play through if terminal rate is 2.5 to 3 percent.

Dave said, "From a balance of payments perspective, I think India is a very attractive destination for conventional as well as industrial FDI, but also FDI coming in the form of flows from private equity funds into startups, etc."

"My own sense is if the terminal rate even today is between 2.50 to 3 percent, I really don't think people come to the country for returns in excess of 4 percent or 5 percent, they come for much higher rates of growth. So as long as the terminal rate assumptions are in this band, 2.50 to 3 percent, then I think we will have wobbles in the financial market. But the structure or the fundamental India story of it being an attractive market for investments, for FDI, even for equity flows eventually will play through," he explained.