Bankers say RBI policy statement a balancing act, sticky core inflation remains a worry

The Reserve Bank of India managed to pull a balancing act with its 35 bps hike in the repo rate on Wednesday, as it navigates challenges on multiple fronts such as global growth concerns, elevated inflationary pressures and volatility in the domestic currency. Most of them, like the central bank, remain optimistic of India’s growth prospects even as sticky core inflation is expected to continue to play spoilsport.

Edited excerpts from banks’ views on the RBI Policy:

Dinesh Kumar Khara, Chairman, State Bank of India

The RBI policy statement is nuanced, nimble and forward looking, and ensures a fine balancing trade-off between growth and inflation. A marginal downward revision in growth estimates reveal that the only certainty in the current environment is uncertainty. A visible improvement in consumer and business confidence as per RBI surveys augurs well for the future growth outlook.

Zarin Daruwala, Cluster CEO, India and South Asia markets, Standard Chartered Bank

The decision to hike the repo rate by 35 bps has struck a delicate balance between reining in inflation within the 2-4 per cent band and avoiding a premature pivot to support growth. The RBI’s confidence around India’s GDP (rural and urban) and external sector augurs well for the economy even as global growth slows. We may continue to see rates at higher levels as RBI continues to remain vigilant on inflation.

Abheek Barua, Chief Economist and EVP, HDFC Bank

The policy tone was distinctly more hawkish than expected. When a central bank combines its sanguine view on growth with continued concerns on inflation, it suggests preparedness to continue the fight against inflation. Other statements also suggested that tightness in financial conditions could intensify. The RBI reiterated that it would continue to manage liquidity conditions through fine-tuning operations, but cautioned markets to wean themselves off the surplus liquidity overhang and not take it for granted. RBI’s preference for a stable rupee implies intervention on both sides of the market to keep it range bound into 2023. Bottom line is that the policy today signalled more rate hikes are in the offing. We expect the terminal rate to be close 6.5-6.75 per cent.

Virat Diwanji, Group President and Head - Consumer Bank, Kotak Mahindra Bank

With a hike of 35 bps, RBI has left much room for future monetary intervention as well as global inflationary factors to improve. Breaking the stickiness in core inflation is the single target for the immediate quarters as the central bank expects booming consumption to sustain economic growth, now revised to 6.8 per cent. We believe RBI remains hawkish for growth but with stability.

Ashu Khullar, CEO, Citi India

While recognising the robust growth and resilience of the economy amidst a challenging global macro environment, RBI’s actions are rightly focussed on moderating inflation in the near term, given that it continues to be above the comfort level. However, the worst of inflationary and external sector pressures might be behind us and if this improving trend continues then we see the possibility of more growth-oriented policy actions.

Murali Ramakrishnan, MD and CEO, South Indian Bank

After a period of persistent effort, we are finally starting to see some headway in reining inflation. A buoyant festival season has been succeeded by a good start to the Rabi sowing period, which augurs well for the Indian economy. Interest rates are bound to rise and GDP growth will be lower. A 35 bps hike seems to be the best bet to manage inflation without denting growth rates severely.

Venkatraman Venkateswaran, Group President and CFO, Federal Bank

Against the backdrop of geopolitical tensions, global uncertainty and slowdown in global growth, the India growth story is a stand-out. Inflation continues to be sticky and further calibrated actions are likely by the central bank. Reigning-in inflation and bringing it below the top-end of the band and then subsequently further down is RBI’s main focus.

Indranil Pan, Chief Economist, YES Bank

RBI reduced the pace of increase to 35 bps but provided no indication of having reached the end of the hiking cycle. The Governor did not mince words to indicate that the critical risk is core inflation remaining sticky and elevated, even as food inflation were to moderate. Momentum of domestic retail inflation remains strong and RBI therefore should remain guarded. With the pace of increase being lowered, the risk is for the rate hiking cycle being elongated. We expect two more rate increases of 25 bps each in February and April.

Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank

The RBI shifted to a lower gear of rate hike after heavy front-loading during H1FY23. In the absence of fresh surprises, the repo rate is not expected to cross the 6.5 per cent mark in the current cycle. That might mean a real rate of over 1 per cent and a nominal spread of about 1.5 per cent between Indian and US policy rates by mid-2023. It is heartening that the RBI sounded more supportive as regards future need of liquidity of the banking system and productive sectors of the economy.

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