Sushant Bhansali, CEO of Ambit Asset Management
The RBI on April 6, in a surprising move, decided to keep the repo rate unchanged at 6.5 percent thus surprising the markets. The decision to keep the rates unchanged was unanimous in the Monetary Policy Committee (MPC). However, in a significant departure from usual tradition, the governor clarified that the pause is temporary and would be reviewed on the basis of future inflation data, thereby bringing flexibility and balance to the monetary policy. The MPC, at the same time, maintained its stance on the withdrawal of accommodation by a 5:1 majority.
We believe that the RBI surprised the markets by taking this temporary pause on the rate hike but at the same time maintaining the stance & evaluating the impact of the hike on the economy. We believe that this is the right approach to ensuring financial stability and balancing the growth & inflation risk. We believe that currently the RBI is amongst one of the best central banks in the world and has constantly been ahead of the curve.
The real GDP growth estimate for FY24 was marginally increased by 10bps at 6.5 percent. GDP growth for FY24 is expected to be front-ended, essentially implying that H1FY24 is likely to be better than H2FY24. This essentially means that India continues to be the fastest-growing among major global economies. This essentially is a strong signal to the markets about the confidence in the core strength of the economy. Also, the GDP growth target is revised to 7 percent for FY23 from 6.8 percent earlier.
Also read: Inflation seen easing in March on softening food price rises: Reuters poll
The RBI inflation forecast was pared from 5.3 percent to 5.2 percent for FY24 on the assumption of a normal monsoon, better Rabi Harvest & favourable base effect. We believe that this target is quite realistic and also shows that positive real policy rates are here to stay, increasing the possibility of a longish pause.
RBI's CPI Inflation forecast at 5.2 percent for FY24 looks realistic as the non-agro commodities have started moderating from the peak, positive outlook will benefit likely from a record Rabi harvest, which shall eventually lead to nearing the end of the rate hike cycle despite projections for crude oil maintained at $85 a barrel.
According to the RBI governor, the economic activity in India remains resilient. Higher Rabi production has brightened prospects of a revival in rural demand. Bank credit grew by 15.4 percent as of March 2023. India's external debt ratio is lower as compared to international standards.
Also read: IMF chief expects global growth fall below 3% in 2023, says poverty will increase
The key macro trend that we are currently witnessing is that of continued softening of the wholesale price index (WPI) which has led to it now being 250bps lower than the consumer price index (CPI) after a gap of almost 2 years. This is a big positive and shall result in gross margin expansion for FMCG, discretionary and industrial companies.
Overall, India’s macro resilient growth is broad-based, higher sown area leads to rural recovery, strong GST collections, improving manufacturing & service PMI, improving capacity utilization & robust credit growth leading to improvement in consumer & Industries confidence.
We maintain our positive outlook on the BFSI sector where we expect double-digit credit growth sustenance for FY24. Also, rate hike cycle has peaked, with improving profitability on account of higher margins & benign asset quality.
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