A sharp increase in the inflation projection for the current fiscal by the Reserve Bank of India (RBI) on Thursday, while highlighting the global economic conditions, has dashed Dalal Street investors’ hope of a rate cut any time in the near future.
Until the last policy meet, expectations were building for a longer pause and possibly, a rate cut later in FY24. However, the tweak in inflation projection has now pushed rate cut expectations to FY25.
While leaving the repo rate unchanged at 6.50% and retaining the policy stance of staying focussed on the withdrawal of accommodation came as no surprise to the market, RBI’s sharp hike in inflation estimate and the imposition of incremental Cash Reserve Ratio of 10% on banks took Dalal Street bulls off guard.
The RBI now sees the consumer price index-based inflation at 5.4% for 2023-24, against 5.1% earlier, in the backdrop of the sharp rise in vegetable prices.
“A substantial increase in headline inflation would occur in the near term… Uncertainties remain on the domestic food price outlook,” Governor Shaktikanta Das said.
Since June, prices of tomatoes have increased by more than 5 times. Meanwhile, crude oil prices have inched above $80 a barrel after hovering at around $74 a barrel in May.
The CPI for July is, therefore, estimated to move back above the upper end of the 2-6% tolerance band of the central bank to 6.2%.“Proactive government measures to curb food inflation should assist in keeping inflation lower, but RBI is likely to stay on hold for the rest of CY2023,” said Deepak Agrawal, CIO – Fixed Income, Kotak Mahindra AMC.
On the domestic front, higher vegetable prices and potential El Nino conditions have created upside risks to inflation, while globally, the easing of inflation has been uneven.
This is evident from the fact that the US Federal Reserve and the European Central Bank are yet to announce the end of their innings in the rate-hardening cycle.
“While the pace of monetary tightening has been scaled down, policy rates could stay higher for longer,” Das said, adding that global growth is also likely to remain low by historical standards in the current year and the next few years.
The current domestic and global conditions have clearly sent out one message that the fight against inflation for central banks is far from over.
Infact, a section of the market now believes that the door for one rate hike back home could open, in case of any inflation shocker.
“If inflation exceeds the RBI’s forecast in the near term, another 25-bps rate hike is not out of the question,” said Sujan Hajra, chief economist and ED, Anand Rathi Shares and Stock Brokers.
Das said that bringing headline inflation within the tolerance band is not enough, and that the central bank will need to remain firmly focused on aligning inflation to the target of 4%.
What should investors do?
With expectations on the rate cycle taking a slight deviation and the incremental CRR raising concerns over liquidity, Dalal Street’s focus in the near term is likely to remain on the inflation movement and the next policy actions by the RBI.
While the market saw a knee-jerk negative reaction to the event today, some experts believe that a correction was long due which has eventually occurred.
“We believe that a dip in the market is much needed. The RBI move may pave the way for a healthy correction,” said Apurva Sheth, head of market perspectives and research, SAMCO Securities.
The Nifty50 slipped below the 19,500-mark and hit a low of 19495.40 points, and Nifty Bank moved below the 44500-level to hit a low of 44479 points.
If Bank Nifty fails to hold above the 44,500 mark, then there is a chance of a fall to 43,500 points, Sheth said, adding that this is a major support level where investors can get into good quality banking stocks.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)