"The outcome of the MPC meet was in line with most of our expectations except that the repo rate hike came in at 50 bps vs 40 bps expected by us.
RBI noted that inflation pressures have intensified and expects inflation to remain above the upper tolerance band of 6% for the first three quarters of FY23. The RBI hiked CPI inflation forecasts by 100bps to 6.7% (vs earlier forecast of 5.7%). The MPC policy actions' impact on inflation will only materialise after couple of quarters. The RBI governor has hoped for more fiscal measures from the Govt to bring inflation under control faster.
While the real GDP growth projection for FY23 is retained at 7.2% based on the fact that drivers of domestic economic activity are getting stronger, they face headwinds from global spillovers in the form of protracted and intensifying geopolitical tensions, elevated commodity prices, COVID-19 related lockdowns or restrictions in some major economies, slowing external demand and tightening global financial conditions on the back of monetary policy normalisation in advanced economies. This number may come up for some downward revision in the forthcoming MPC meets.
The bond markets and equity markets reacted well to the MPC outcome being relieved that the MPC did not sound more hawkish than most expectations. Absence of a CRR hike also was a relief. Stock prices of rate sensitive sectors including Auto, Banks, Finance, Durables, Realty have reacted well to the MPC outcome due to the above. However, this upmove may need more triggers to continue.
While a revisit of the pre Covid repo rate of 5.15% over the next 1-2 meets is a given (vs 4.90% currently), most economists expect this to go above 5.15%. A lot in this regard will depend on how soon the inflation peaks out and begins to fall and when do the global Central Banks feel that they are done with the rate hikes for now."