Market in see-saw mode post-RBI policy, here are the key factors at play

Average system liquidity is in surplus mode and could increase as Rs 2,000 notes get deposited in banks, says RBI Governor Das

Indian equity benchmarks surrendered early gains to trade marginally in the red on June 8 following the Reserve Bank of India's monetary policy announcement.

Market sentiment was dented after a surprise interest rate hike by the Bank of Canada had a ripple effect on global equities, with investors fearing the US Federal Reserve could remain hawkish when it meets next week.

Against this backdrop, benchmark 10-year yields in Australia rose around 15 basis points and Japanese yields edged about 2 basis points higher.

Despite India's central bank keeping rates unchanged, yields rose slightly, with governor Shaktikanta Das citing the rate hikes in Australia and Canada as a possible indication of future increases given the uncertain inflation outlook.

The BSE Sensex was trading 47 points down at 63,095.41 at 12.20 pm, while the NSE Nifty dropped 24 points to 18,702.25.

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Let’s look at the factors influencing the benchmarks:

In-line RBI policy

The Reserve Bank of India's Monetary Policy Committee (MPC) retained the repo rate, the key short-term lending rate, at 6.5 percent in line with expectations. It also stuck to the “withdrawal-of-accommodation” stance.

The rate increase cycle was paused in April after six consecutive hikes aggregating to 250 basis points since May 2022 to curb inflation. One basis point is one-hundredth of a percentage point.

While announcing the decision, RBI governor Shaktikanta Das also signalled the central bank’s readiness to act in keeping with the incoming data.

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Growth forecast unchanged

The central bank maintained its GDP growth projection for the fiscal year 2023-24 at 6.5 percent, with Das saying the Indian economy and financial sector remained resilient amidst global challenges.

The MPC anticipates that growth will fluctuate throughout FY24, with an expected surge to 8 percent in the first quarter before tapering off to 5.7 percent by the final quarter.

The March quarter’s GDP reading of 6.1 percent beat economists’ consensus by a wide margin, signalling that the recovery is on track.

In a vote of confidence for the nation's economy, Das said, "Indian economy and financial sector stand strong and resilient amidst unprecedented global headwinds."

Also read: RBI MPC Meeting 2023: Key highlights so far from the MPC review

Inflation projection lowered

The RBI has made a slight downward revision to its inflation forecast for 2023-24, lowering it by 10 basis points to 5.1 percent.

Das said the risks to the inflation forecasts were "evenly balanced".

The quarterly break-up of the inflation forecast stands as follows:

>> April-June 2023 CPI inflation forecast cut to 4.6 percent from 5.1 percent

>> July-September 2023 CPI inflation forecast cut to 5.2 percent from 5.4 percent

>> October-December 2023 CPI inflation forecast retained at 5.4 percent

>> January-March 2024 CPI inflation forecast retained at 5.2 percent

Also read: RBI lowers inflation forecast for FY24 to 5.1%, makes big cut in Q1 estimate

Macro metrics

The current account deficit (CAD) would likely have moderated further and should be eminently manageable in FY24, the central bank chief said.

Forex reserves stood at $595.1 billion as on June 2.

The Indian rupee has been stable since January and domestic demand condition remained supportive of growth, he said, adding that domestic macro fundamentals were strengthening.

Liquidity

Average system liquidity was in surplus and could even increase as Rs 2,000 notes get deposited in banks, Das said.

Net inflow in non-resident deposits increased to $8 billion in FY23 from $3.2 billion in the previous year.

Das said the RBI would issue RuPay forex cards and also come out with guidelines on default loss guarantee arrangement (DLGA) in digital lending.

The RBI would issue DLGA norms for digital lending for the orderly development of the eco-system and to improve credit penetration.

The central bank proposes to expand the scope and reach of e-RUPI vouchers by permitting non-bank Prepaid Payment Instrument (PPI) issuers to issue e-RUPI vouchers.

Global Tremors

Surprising the markets, the Bank of Canada (BoC) hiked its overnight rate to a 22-year high of 4.75 percent, with analysts forecasting yet another increase next month to cool an overheating economy and stubbornly high inflation.

The central bank had been on hold since January to assess the impact of previous hikes after raising borrowing costs eight times since March 2022.

The BoC's decision comes after Australia also stunned markets by hiking interest rates earlier this week. The Reserve Bank of Australia later warned of more rate hikes to temper rising pricing pressures.

Markets are now pricing in a 64 percent chance of the Fed maintaining status quo next week, compared with 78 percent just a day earlier, as per the CME FedWatch tool.

Analysts’ reactions

“The policy highlighted the stable macros – inflation trending lower, Q4 FY’23 growth strong, narrowing trade deficit, fiscal deficit in control and demand and economic high frequency data showing strength…

“The need to bring down inflation to the targeted 4 percent level was emphasised and risks of inflation upside from monsoons, geopolitical tensions, global financial market volatility and global growth deceleration were highlighted,” said Shanti Ekambaram, whole-time Director, Kotak Mahindra Bank.

The RBI reiterated its “watchful stance” to emerging risks and a commitment to maintain price stability and providing ample liquidity for growth. Rates were likely to be paused for long unless there was a dramatic shift in inflation, growth or global volatility, Ekambaram added.

“With inflation numbers down by 90 bps compared to last month, GDP growth on the upward trend - we all expected the rate to be unchanged,” said Aalesh Avlani, Founder, Credit Wise Capital.

A slightly aggressive stance on reducing the rate would have been appreciated to fuel growth. “However, macro policies are aligned with the GDP estimates and that is something to cheer on. One can sense the optimism and it’s a good time to build in India,” Avlani said.

In the wake of a greater-than-anticipated decline in inflation in the recent past, it was anticipated that the monetary policy would shift from a liquidity withdrawal to a neutral stance, however, the MPC decided to maintain the current stance by a majority vote, said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers. “This is due to the fact that the demonetisation of Rs 2,000 banknotes has significantly contributed to the recent increase in liquidity,” Hajra said.

In addition, projections indicate that RBI's inflation target of 4 percent will be exceeded each month of the current fiscal year. While the continuation of the policy stance was somewhat disappointing, the central bank's cautious approach in light of upside risks, such as the potential impact of El Nino on monsoon and the continuation of the monetary tightening by the world's major central banks, appeared justified and well-articulated, he added.

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