A day before the monetary policy announcement, the yield on the 10-year bond fell sharply on a media report that the MPC would signal a pause after Friday’s hike. Thankfully, the MPC held firm, refusing to oblige the bond markets. Not only did it increase the repo rate by 50 basis points, but also the MPC signalled more rate hikes in future by refusing to tone down its ‘withdrawal of accommodation’ stance.
Much is being made of the fact that the policy rate is now at the pre-pandemic level. At 5.4 percent, the repo rate is now back to where it was in September 2019. But that is no big deal. GDP growth was a measly 3.7 percent in 2019-20 compared to RBI’s projection of 7.2 percent in 2022-23; retail inflation was a much lower 4.8 percent in 2019-20, compared to a projected 6.7 percent for 2022-23; the current account deficit was a comfortable 0.9 percent of GDP in 2019-20 as against projections of around 3 percent in 2022-23; the combined fiscal deficit of the central and state governments was 7.5 percent in 2019-20 and it’s forecast to be a massive 9.9 percent for 2022-23. Surely, considering all these factors, the policy rate needs to be much higher today than it was back in September 2019.
That said, the RBI governor’s statement exuded optimism about domestic growth. That should cheer the equity markets. We had said earlier the solid PMI numbers would provide comfort to the RBI for a 50 basis point rate hike. Corporates have deleveraged and banks are in much better shape, setting the stage for an upturn in the business cycle in India. There is, though, one caveat — Sashi Sivramkrishna points out that monetary policy is a blunt tool and raising interest rates may have wholly unintended consequences.
We hope you were able to use these insights to trade the RBI policy event.
Although our Economic Recovery Tracker is giving mixed signals, the June quarter results show the corporate sector in fine fettle. We analysed plenty of results this week and most of them showed strong growth. Examples include InterGlobe Aviation a.k.a Indigo, RateGain Travel Technologies, NTPC, ITC here and here, EasyTrip Planners, JK Paper, TVS Motors and Nestle India. Among other companies on our list, Lemon Tree Hotels, Transport Corporation of India, Nazara Technologies, Devyani International and Metro Brands have delivered outstanding results.
Of course, not all firms have done superlatively, given the rise in input costs, but even for such companies, there’s talk of better times ahead. Emami, Godrej Consumer Products, Dabur India and Dhanuka Agritech are cases in point. Auto sales are expected to improve with the rural economy doing better. An upcycle is commencing for the commercial vehicle sector. Rural jobs are coming back, which should add to rural consumption demand, although our Monsoon Watch flags some risks to that rosy assessment. Supply-side bottlenecks are easing. Input costs are coming down, with commodity and crude oil prices falling. In short, this is the right time to front-load hikes, as the growth momentum is strong.
Of course, as the RBI governor said at the post monetary policy press conference, India cannot remain immune to global headwinds. Indeed, the RBI has for long been pointing to the divergence between relatively robust growth in India and the risks from the global environment. That is why the markets are climbing the proverbial wall of worry, with investors agonising whether it’s a bear market rally or a new uptrend, whether the Powell pivot that markets expect is for real, and why the market is rallying while the major advanced economies are likely to slip into a recession. There are other reasons for the rally to be unloved and this FT story, free to read for MC Pro subscribers, says many fund managers have been unable to take advantage of it. Long-short hedge funds, in particular, are having an annus horribilis, while venture capital has suffered a silent crash.
The event of the week, though, wasn’t the monetary policy announcement. Nor was it the remarkably candid admission by the Bank of England that they had to hike rates sharply to pull down inflation, even though it would lead to a recession, an admission that other central banks in the developed economies would do well to emulate. Instead, the topic of the week was US House of Representative Speaker Nancy Pelosi’s trip to Taiwan. That led to much smoke and some fire from the Chinese dragon, escalating risks for the global economy and a widening geopolitical rift between the East and the West.Should you be worried? Perhaps this little Monty Python ditty will help.