Morgan Stanley sees the Reserve Bank of India (RBI) going in for 50 basis points hike in policy rates in each of the next two monetary policy review meetings slated for June and August 2022, its Chief Asia Economist Chetan Ahya has said.
“We are expecting RBI to hike (policy rates) meaningfully over the next few months. Next two meetings— June and August— we are expecting RBI to do 50 basis point rate hike in each of the meeting. It would be frontloading the rate hikes”, Ahya said at an interaction on Morgan Stanley’s 2022 mid-year Asia Macro and Strategy Outlook.
He was responding to a BusinessLine query on the expectations from the RBI regarding policy rate hikes to tame the surging inflation.
India’s retail inflation in April 2022 hit an eight-year high at 7.79 per cent mainly due to high food prices. The food inflation had surged to 8.38 per cent in April against 7.68 per cent in March and 1.96 per cent in April last year. This was the fourth straight month, when the CPI-based inflation stayed above the RBI’s comfort zone of 2-6 per cent.
The RBI had in April revised the inflation projection to 5.7 per cent for 2022-23. The central bank, has for this fiscal, projected Q1 inflation at 6.3 per cent, Q2 at 5.8 per cent, Q3 (5.4 per cent) and Q4 (5.1 per cent).
RBI’s decisive response
Ahya highlighted that the RBI itself has been guiding towards monetary tightening (aggressive policy rate increase). “ We do think RBI is going to respond decisively to the inflation challenge that the country is facing. From RBI’s positioning perspective, they will be withdrawing the accommodation, and if you look at real rate trajectory,. policy is not going to get to neutral or restrictive anytime soon. It will have to be a scenario where real rates will be less negative, but it will take some time for inflation to come down and for policy rates to get to neutral levels first, which we are expecting to happen in the second-half of 2023”, he said.
Ahya said that the transition to 25 bps run rate would eventually take the terminal policy rate to 6.5 per cent in 2023. After the recent inter-meeting surprise decision of 40 basis point rate hike, the repo rate now stands at 4.40 per cent.
Morgan Stanley’s Asia Economics Mid-Year outlook has highlighted that slowing global growth environment would mean that external demand conditions for Asia will soften. However, the domestic demand will help to fill the gaps, because most of the large Asian economies are in the mid-cycle stage of the expansion and supported by a fuller reopening.
“We are the most constructive on the outlook for India, Indonesia, and the Philippines: These are the three economies which rely most on the domestic demand to drive growth”, Ahya said.
Morgan Stanley Research noted that the domestic demand has lifted off with the help of reopening and has become more evident in the incoming data. Encouragingly, the capacity utilisation is rising too, which, among other reasons, will help start a capex cycle. Moreover, India had been taking up structural reforms even before the pandemic hit, and the benefits will now accrue as the cyclical recovery takes hold.
“One of our concerns a few weeks back was that the RBI might fall behind the curve in addressing inflation. However, these fears have been alleviated with the recent surprise 40 bps rate inter-meeting hike, which opens the prospects of further actions of the central bank in addressing price stability concerns (this came in quick succession after a 40bps increase of the effective policy rate in the April meeting).
Policy Normalisation
The domestic demand recovery and inflationary impulses mean that central banks in Asia will have to accelerate their policy normalisation process. By September 2022, Morgan Stanley Research expect the region’s weighted average nominal policy rates to surpass their pre-Covid levels. With inflationary pressures building, Morgan Stanley Research sees the need for central banks to lift rates and have built in a higher rate forecast for end-2023 for Australia, India, and Korea.
“While almost all central banks are tilting hawkish, China and Japan are on the other side of the spectrum. China remains on the easing path, cutting policy and RRR rates further, while at the same time pushing infrastructure spending and easing housing policy and big tech regulations”, said Morgan Stanley Research in its mid-year outlook.