View: Final status quo RBI monetary policy review

A modest broad basing of the recovery was witnessed in Q3 FY2022 relative to Q2 FY2022, with a larger number of high-frequency data points reported an increase in volumes relative to pre-Covid levels (Q3 FY2020). Subsequently, the rapid spread of the omicron variant and the imposition of restrictions by state governments moderated activity in January 2022, particularly in the contact intensive services segment and big-ticket consumption. This may trigger a downward revision in the RBI’s Q4 FY2022 and full-year FY2022 projection of 6 percent and 9.5 percent, respectively.

The MPC will also likely issue growth forecasts for FY2023 in its policy meeting, which are keenly awaited. At ICRA, we expect GDP to expand by 9 percent in FY2023, marginally higher than our estimate of 8.9 percent in FY2022. However, growth in FY2023 is likely to be more broad-based and tangible as compared to the base effect led surge in FY2022.

The GoI has clearly prioritised growth over fiscal consolidation in its Union Budget for 2022-23, with the fiscal deficit budgeted at 6.4 percent of GDP for FY2023, well above market expectations. It hiked Central and PSU capex by 10.4 percent in FY2023, while laying down reasonable revenue and nominal GDP assumptions. The RBI and MPC are unlikely to view the limited fiscal consolidation unfavourably, given that the central bank has repeatedly stressed on the need for sustained policy support to make growth broad-based.

On an unpleasant note, the CPI inflation had surged from 4.9 percent in November 2021 to a six-month high of 5.6 percent in December 2021, and is likely to have climbed further to 5.9 percent in January 2022. While the Q3 FY2022 print, at 5.0 percent, was slightly lower than the RBI’s projection of 5.1 percent, we expect CPI inflation to overshoot the central bank’s Q4 FY2022 projection of 5.7 percent. Consequently, the full year FY2022 inflation print is expected to come in at 5.5 percent, slightly higher than the RBI’s projection of 5.3 percent.

The FY2023 CPI inflation forecasts will also be released along with the policy decision, and the Central Bank’s projections and commentary around the trajectory of inflation would be crucial to determine policy action through the year. We expect CPI inflation to ease to 5 percent in FY2023, with risks tilted to the upside owing to the continued pass-through of elevated cost pressures to end consumers.

While the MPC is expected to maintain status quo in the February policy review, it is likely to signal towards policy normalisation in the near term. We believe that this will only play out very gradually with the rate hike cycle being quite shallow given concerns around the durability of growth and the large output gap. We expect the MPC to change the monetary policy stance to neutral and hike the reverse repo rate by 15bps in the April 2022 policy. While we are penciling in two rate hikes — of 25bps each in the June 2022 and August 2022 policy meetings, we expect an extended pause thereafter, until there is a tangible improvement in the durability of growth. The rate hikes are also expected to be accompanied with a calibrated reduction in the liquidity surplus.