Nilesh Shah: Market expects 25bp rate hike over next 6 months: Nilesh Shah

“RBI allows an interest rate hike on an anticipated basis because the resilience of growth is good. If there were interest rate hikes, GDP growth instead of 7.2% could have been be 7.4% or 7.5,” says Nilesh Shahdoctor, Kotak AMC

How do you see the path of inflation going forward? Have we seen the worst and maybe not seen that 7% mark moving forward?
It looks like this with the commodity price correction and even the oil price correction. So with a good monsoon, commodity prices down, oil prices down, it’s fair to assume that we experienced a spike in inflation and as RBI predicted, somewhere around the fourth quarter by FY23, inflation will be below the upper band of the RBI target range.

The main differentiator of the RBI compared to many other central banks is that the RBI manages to control inflation while maintaining high growth. India will be the fastest growing major economy in FY23, while many other central banks are looking for recession to strain their economy to control inflation. Yesterday we saw the UK’s Bank of England announcing a recession as well as high inflation. Clearly, RBI has kept India’s economy strong in turbulent weather, while many other peers are actually making a hard landing in their economy.

Where do we go from here? We were expecting a little more accommodating feedback and it was a bit of a blender to come this time around. Do you expect the rate of the interest rate hike cycle to decrease to at least 25-35 basis points in the future?
Most likely, in the future, we will see a rate hike of 25 basis points. The terminal repo rate used to be around 6-6.25%, but last month’s drop in inflation brought it down to 5.75-6%. We are therefore already at a level with this 50 basis point hike and can afford to make rate hikes of 25 basis points over the next six months. The market will undoubtedly expect a rate hike of 25 basis points in the future.

If we start from the RBI rate hike cycle from May to August, in four months we have seen a bullish line of 140 basis points, which is by no means trivial. Yet, GDP estimates as well as inflation estimates, except for one quarter, remained completely unchanged. So does it seem that monetary policy really makes no difference? Does monetary policy really matter?
There is no doubt that monetary policy is important and as you rightly said in India the transmission of monetary policy takes about two to three quarters and what surprised us was the resilience of the Indian economy. The weak spot in the Indian economy was consumption at the end of the March quarter of 2022 and FMCG sales were down around 4.1%, fortunately for the June quarter which was negative but only 0.7%.

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Public spending has been good. Private capex is resurfacing. The monsoon was good except for some plots in the north and northeast. Overall, RBI allows interest rates to rise on an anticipated basis as growth resilience is good. If there were interest rate increases, GDP growth instead of 7.2% could have been 7.4% or 7.5%. So there is a frontloading reduction in interest rates, but that’s to make sure that India’s inflation targeting continues to work. We are now quite confident that in the fourth quarter of FY23, the upper 6% range of RBI will see inflation printed below.

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