Economy: RBI cuts GDP forecast to 7% in FY23 as markets respond positively
Virendra Pandit
New Delhi: Amid dire predictions of a global recession starting in December 2022, the Reserve Bank of India (RBI) on Friday hiked the repo rate by 50 basis points (bps) to 5.9 percent and cut the GDP forecast to 7 percent but the markets responded positively, showing investors’ confidence in the post-pandemic rebound of Indian economy, slated to be the fifth largest worldwide by 2025 with a USD 5 trillion size.
The central bank’s in-line monetary policy action lifted equities as the benchmark indices snapped their seven-day losing streak, underscoring the resilience of the Indian economy.
The S&P BSE Senses climbed 1,313 points intra-day before cooling off to 57,427, up 1,017 points or 1.8 percent. The NSE Nifty50 inched closer to the 17,200 level before ending at 17,094, up 276 points or 1.64 percent.
Twenty-six of the 30 Sensex constituents and 41 of the 50 Nifty constituents closed in the positive zone led by Hindalco, Bharti Airtel, IndusInd Bank, Bajaj Finance, Kotak Bank, Titan, HDFC Bank, Bajaj Finserv, Tata Steel, and ICICI Bank. These shares rallied between 2 percent and 5.6 percent.
The losers included Asian Paints, Coal India, Dr. Reddy’s Labs, Britannia, Adani Enterprises, and ITC.
Among sectors, the Nifty PSU Bank, and private bank indices advanced around 3 percent each, followed by the Nifty Metal, and financial services indices, up 2 percent each.
The RBI’s Monetary Policy Committee (MPC) announced a 50 basis points (bps) hike in the repo rate to 5.90 percent on Friday to bring elevated inflation back to its target. Considering Friday’s rate hike, the MPC has hiked the benchmark policy rate by 190 bps in 2022-23.
The consumer price index (CPI) inflation for the current financial year is seen at 6.7 percent, with the price gauge seen at 7.1 percent in the second quarter (July-September 2022).
“The standing deposit facility (SDF) rate is now at 5.65 percent and the marginal standing facility (MSF) rate at 6.15 percent, ” RBI Governor Shaktikanta Das said. The SDF is the lower band of the interest rate corridor and the MSF is the higher.
After Friday’s announcement, the yield on the 10-year benchmark government bond was trading 2 basis points higher at 7.36 percent. The rupee was trading at 81.66 per dollar, more potent than 81.85 per dollar at the previous close.
The MPC believed the persistence of high inflation caused a further calibrated withdrawal of monetary accommodation to contain second-round effects and anchor inflation expectations, Das said.
Flagging upside risks to food prices and the spreading of cereal prices pressures spreading to other food products, he said the MPC had kept the projections for CPI-based inflation given earlier.
The CPI inflation for FY23 is seen at 6.7 percent, with the price gauge at 7.1 percent in July-September, 6.5 percent in October-December, and 5.8 percent in the January-March quarters. In the first quarter of FY24, it would be 5 percent.
The RBI’s target for CPI inflation is 4 percent, with a flexibility of 2 percent on either side. The latest data showed that CPI inflation has remained above the RBI’s target zone for the first eight months of 2022.
India’s retail inflation rate reversed its three-month downward trend, rising from 6.7 percent in July to 7 percent in August, driven by a surge in food prices. With Russia’s invasion of Ukraine on February 24 exacerbating supply-side disruptions and leading to a sharp rise in prices of several global commodities, India’s retail inflation has faced upward pressure.
While pointing out that India’s GDP growth in the April-June quarter was among the highest in the world, Das acknowledged there were also downside risks to economic growth. The MPC announced a reduction in the actual GDP forecast for the current year from 7.2 percent earlier to 7 percent.
The GDP growth in the July-September period is seen at 6.3 percent, for the October-December quarter at 4.6 percent, in January-March at 4.6 percent, and for the first quarter of the next financial year at 7.2 percent.
