HDFC Bank says markets may be in for a surprise after RBI’s monetary policy review
When the monetary policy committee of the Reserve Bank of India (RBI) will announce its decision on key rates tomorrow April 8 and although there may be a consensus building to leave it unchanged repo rates and inversions, HDFC Bank’s treasury research team has pointed out that markets could be taken by surprise if they expect the central bank to sing along to the dovish tone set out in February policy.
In its note, the HDFC Bank research team pointed out that the global as well as domestic outlook has undergone a significant change since the last RBI policy in February 2022.
“Geopolitical tensions and growing hawkishness from the US Fed have an effect on everything from inflation to the rupee to yields. While it is true that there are countries that are going against the narrative. Fed hawks – and India perhaps have some space to keep rates unchanged for now, but prolonged deviation could be destabilizing We think maybe it’s time for RBI to have may begin to link itself to other major central banks.
The HDFC bank added that inflationary pressures are mounting, not only due to the escalation of gasoline and diesel prices, but also because higher transport costs are impacting the prices of most other commodities.
“We suspect that the RBI can recognize these inflation risks and may even go as far as to offer some hints of a change of stance to neutral in its forward guidance. This can be justified by the upward revision of RBI’s inflation forecast from 4.5% to Medium 5.2 to 5.5% for 2022-23 while growth forecast is likely to be unchanged in rate of 7.8% for this fiscal,” the bank said in its research report.
Furthermore, as the economy emerges post-pandemic, a high liquidity surplus is probably also unproven and the central bank could consider a similar reduction in the coming months. This would again conflict with keeping the profit range bound. HDFC Bank further notes that the recent dollar-rupee swap of $5 billion opens up space for bond interventions in the near term but the same amount remains small in rupee terms, the Bank said. HDFC notes further.
It explains: “Beyond a point to balance this fine balance between the range-bound rupee, no interest rate hikes, liquidity surpluses, moderate inflation and yield caps could become should be difficult, especially with rising global pressures,” it explained.
