RBI MPC meeting outcome: Rates, stance, liquidity and forecasts—What RBI should do? HSBC Global Research decodes

The Reserve Bank of India's monetary policy committee (MPC) began its deliberations on Wednesday and the outcome of RBI Governor Shaktikanta Das led six-member Monetary Policy Committee (MPC) will be announced on Friday, September 30. 

Ahead of the outcome of the RBI MPC meeting, experts and economists are of the view that the RBI may hike the rates by 35-50 basis points in order to tame inflation and protect the falling rupee.  

"With Fed leading the pack in hiking rates and other central banks following suit this month, the stage seems set for RBI to hike rates in upcoming MPC by 35+ bps to protect the rupee as well as contain inflation. While the rate hikes have been aimed at demand side, inflation is now threatening to regain it's upward trajectory due to supple side constraints. RBI will have to evaluate the impact of rate hikes going forward and play a balancing act," said Rohin Agarwal, Vice President at Avener Capital. 

With the growth-inflation mix getting trickier with global growth indicators weakening, domestic GDP data confounding, and inflation remaining well above the 4% target on the back of several shocks all at once, HSBC Global Research tells what RBI should do on September 30:  

It said with inflation expectations elevated, we believe a big quantum rate hikes will likely continue for now. Here is what it said on rates, stance, liquidity and forecasts. 

Rates – We expect a 50bp repo rate increase in the upcoming September 30 meeting, followed by another 50bp increase in the December meeting, taking the repo rate to 6.4% by December 2022.  

Stance – We believe the RBI will move to a neutral stance soon, but are agnostic about that happening in September versus December. If markets (especially the FX market) are volatile going into the September policy, the RBI may prefer no change in stance for now. But if the volatility subsides, they could well change their stance. 

Liquidity – Banking sector liquidity has tightened considerably, pushing the call money rate over the repo rate. The tightness has many drivers – large spot FX intervention by the RBI, an ongoing GST and advance tax period, and large government balances at the RBI. As the tax period ends and the government starts spending, some of the liquidity deficit could ease. The recent trend of spending more towards the year-end is creating a problem on the liquidity front at a time of FX interventions. We expect the RBI to bring this up in its discussion with the government. 

Forecasts – We believe the RBI will not change its 6.7% inflation forecast for FY23 (HSBC: 6.9%) given the quarterly trajectory seems to be unfolding in line with its expectations. But it may lower the 7.2% growth forecast (HSBC: 6.8%) given the negative surprise in June.