Kotak AMC expects change in monetary policy stance to neutral with last repo rate hike for 2023

We expect the MPC to hike rate by 25 bps and change the monetary policy stance to neutral, suggesting future rate actions would be data dependent.

Deepak Agrawal, CIO – Debt & Abhishek Bisen, Head – Fixed Income at Kotak Mahindra Asset Management Company

Since the last RBI Monetary Policy Committee (MPC) meeting in February 2023, we have seen a roller coaster move in the rates market.

February 2023 saw a rise in the yield on the back of strong inflation numbers and employment data, resulting in market pricing of 5.50-5.75 on US Fed Fund rate.

However, since early March, the banking sector crisis and the resultant tightening of the financial conditions had led to the scaling back of rate hike expectation in US, with some even calling for a cut in the March 2023 policy.

Despite the nervousness in the US Banking sector, Federal Reserve hiked rates by 25 bps in the March 2023 policy and indicated 5-5.25 percent as terminal Fed fund rate for now. Tightening of the Financial conditions is akin to a rate hike and therefore, if the financial conditions tighten further, Federal Reserve may be done with its rate hike.

Related stories

Deepak Agrawal

Chief Investment Officer (Debt Fund)|Kotak Mahindra Asset Management Company

The European Central Bank (ECB) also moved ahead with its rate hike despite the global financial markets concerns.

Global developments has led to an reduction of terminal rate expectation in India as well and the market opinion now seems to be divided between a “hawkish pause” and a “dovish hike”. There are strong arguments in place for both opinions.

The arguments in favour of "Hawkish Pause” - Status quo on rates with no change in stance.

The overnight rates have moved up ~ 300 bps from 3.35 percent in March 2022 to 6.5 percent in March 2023, inflation likely to average 5.25-5.5 percent in FY24, recent global market development leading to scaling back of global rate hikes expectations, downward pressure on FY24 Growth in India due to global growth concern and the lags with which monetary policy operates.

RBI can stay on hold for now and communicate its willingness to tighten further if situation warrants. Liquidity in the system is likely to reduce further over the course of next 3 months supporting to withdrawal of accommodation stance.

The argument in favour of “Dovish hike” – hike rate and change the stance to “neutral”

Fed/ ECB has hiked the rates despite global market concern, there continues to be a window for further tightening by global central banks, upside risks to food inflation due to weather-related risks (warmest February in more than 100 years, unseasonal March rains, potential El-Nino risks in July/August), sticky core inflation, real policy rate of ~ 145 bps (6.75 percent repo rate less FY24 average inflation forecast of 5.30 percent) similar to real policy rates in 2019, before RBI started easing rates.

Given the liquidity in the system and real policy rates moving back to the early 2019 levels, significant tightening over the last year and lag with which monetary policy operates, RBI can change the monetary policy stance to neutral – suggesting further monetary actions would be data dependent. By changing stance to neutral RBI is not giving its flexibility to tighten further in future.

We see merit in both the arguments, however our tilt is towards a “Dovish hike.”

We expect the MPC to hike rate by 25 bps and change the monetary policy stance to neutral, suggesting future rate actions would be data dependent. Post that we expect RBI to stay on hold for the rest of CY 2023.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.