The monetary and credit policy, which will be announced on December 7, is significant for several reasons. The most obvious is the interest rate decision. However, the outlook for the economy would be something that the market would look at. This is so because there are mixed signals coming from various economic indicators. Here are the perspectives of some BFSI experts on the state of the economy, the positive trends, areas of concern and the necessary corrective measures.
Aditi Gupta, Economist, Bank of Baroda: On the positive side, PMIs continue to be buoyant indicating steady activity in manufacturing and services. Tax collections through GST in particular continue to be good which is indicative of high consumption till November. Fiscal deficit is largely under check. Growth in credit seems to be up though tilted more to retail and services.
However, there are areas of concerns. Inflation continues to be above 6%. Exports growth has slowed down and will continue to do so as the world steps into recession-like conditions. Core sector growth came in flat for October which is indicative of some slowdown in infra-activity. GDP growth in the second quarter has slowed down. RBI’s call on GDP growth will be eagerly watched. Savings are coming down as seen in slower growth in deposits. This also means higher CAD at 3-3.5%. Kharif output for rice and pulses is expected to be lower. This can affect prices at one end and rural demand at the other.
Under these conditions we do believe that the MPC will continue with rate tightening though will reduce the intensity to 25bps increase this time. This will be followed with another 25/35 to make the terminal rate 6.5% in March 2023.
Radhavi Deshpande, Joint President & Chief Investment Officer, Kotak Mahindra Life Insurance Company: Having orchestrated a little more than two and a half percent move in the overnight operative rate through policy rate hikes and liquidity unwind measures, monetary policy committee (MPC) can now afford to embark on baby steps from here on. Incremental momentum in inflation is showing signs of moderation owing to falling commodity prices amidst global growth slowdown. Hence MPC focus can shift to assessing the lagged impact of past policy actions. We expect a 25bps in the coming policy and a data dependent stance going forward.
Indranil Pan, Radhika Piplani & Deepthi Mathew, Business Economics Banking, YES Bank: Minutes from the last MPC meeting indicate a split in the opinion on growth-inflation mix. Some members were worried of the slowing growth while others were concerned about anchoring inflation expectations. Thus, a difference of opinion had arisen on the pace of incremental hikes. While consensus view is for a 35 bps hike by the RBI on 7th December, we think that the uncertainties bordering domestic inflation remains high and it would be prudent for the RBI to continue to focus on inflation containment. We favour a 50 bps repo increase on 7 December and another 25-35 bps increase in February 2023.
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research: We note a divergence among the different data sets on the manufacturing sector. On the one hand, the IIP and the core sector print have highlighted a weakness in manufacturing activity in H1FY23. On the other hand, the PMI manufacturing index at consistently well above 50, continues to highlight an expansionary trend and along with the PMI services, indicate an improved business sentiment. This may be a reflection of an expectation of steady recovery in domestic demand conditions despite the global headwinds. This is one of the reasons why we have decided to hold on to our 7% GDP forecast for FY23. Going forward, while we expect consumer demand to improve amidst the easing of inflationary pressures, it could simultaneously feel the pinch of the lagged impact of 190bps of repo rate tightening undertaken by RBI so far.
Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company: We are witnessing early signs of peaking inflation as a result of sharp monetary tightening witnessed in the recent past. Since monetary policy acts with a lag, the MPC may want to take a bit of a breather in its fight against inflation to assess the impact of past policy actions. In light of the above, the upcoming policy meeting may see only a 25bps policy rate hike. The MPC may also hint at the likelihood of a subsequent pause in monetary tightening, especially if CPI inflation continues its downward trajectory in coming months. However, a pause in policy tightening, if any, should not be interpreted as a promise of a pivot just yet.
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