Declaring that “RBI is not bound by any stereotypes and conventions; we will continue to be dynamic in our approach”, Governor Sakti Kanta Das unveiled the June monetary policy, largely on expected lines. Since inflationary impulses had turned out to be worse than expected and the Governor had earlier remarked in an interview that ‘a rate hike is a no-brainer,’ it was widely expected that the rate hike would be in the range of 25 to 50 bp. The fact that the actual hike came at the top end of the band is a reflection of the central bank’s focus on anchoring inflation expectations and containing inflation to around 5.8 percent by Q4 of FY23.
The significant positive of the RBI’s policy is its serious recognition of the inflation threat by raising the FY23 inflation projection by one percentage to 6.7 percent from 5.7 percent earlier. And the central bank has walked the talk by raising the repo rate by a steep 50 bp. If the MPC had decided to raise the repo rate only by 25 bp, perhaps the markets would have sold off, unconvinced by the central bank’s lack of determination to fight inflation.
Growth momentum conducive to withdrawal of accommodation
Governor Das emphasized the growth momentum in the economy as reflected in the improving capacity utilization to 74.5 percent in Q4 FY 22, buoyant exports and sustained increase in GST collections. This macro backdrop is conducive for change in the monetary stance and, therefore, the central bank “would focus on withdrawal of accommodation’. The central bank is confident of achieving GDP growth rate of 7.2 percent in FY23 even when rates go up. Even while sounding hawkish, Governor Das made it clear that “we will ensure adequate liquidity.”
Rates will rise further
CPI inflation has been above the RBI’s comfort zone for 4 months in a row and is likely to remain above 6 percent in the first 3 quarters of FY23. Therefore, the MPC can be expected to raise rates in the coming policy meetings too. This tightening cycle is likely to end with a terminal repo rate of around 6.25 percent by mid-2023. This is slightly negative for rate sensitives like real estate and autos.
It is important to appreciate the fact the situation is highly volatile. The big unknown factor now is how long the Ukraine war will linger. Since the war is the single most important factor that has pushed up energy and commodity prices, if the war suddenly ends, it can trigger a crash in crude and other commodities leading to a moderation in inflation. Consequently, the RBI may turn less hawkish than it is now. But now, this is an unknown area.
Adopt a cautious investment strategy
For investors, it is better to adopt a cautious investment strategy in these highly volatile and uncertain times. Even after the recent corrections, the market is not cheap. At 16000, Nifty is trading at above 18 times FY23 earnings. This is higher than the long-term average of around 16. Since the dollar is strong and US bond yields are rising, FPIs are likely to sell at every rise in the market. This trend will change only if US inflation shows a declining trend enabling the Fed to turn less hawkish than now.
Even though valuations are generally high, some market segments are fairly valued. Therefore, investors can use the weakness in the market to slowly accumulate high-quality stocks in sectors like financials, IT, select autos and export segments like chemicals and pharma. In fact, calibrated buying in small quantities, in blue chips across sectors, would be a safe investment strategy.
First published in livemint.com.
