Constituent policy

Key Takeaways and Valuation Strategy Behind Reserve Bank Of India’s Monetary Policy Decision

New Delhi: The Reserve Bank of India (RBI) has announced its highly anticipated rate hike – the 4th consecutive hike in the current cycle. And as most analysts had predicted, RBI Governor Shaktikanta Das’ six-member Monetary Policy Committee (MPC) recommended a 50 basis point hike to 5.90% and put it on hold. implemented with immediate effect. To date, the RBI has raised rates by 190 basis points since May this year. The next meeting of the MPC is scheduled for December 5-7, 2022.Also Read – Markets Glow Green After RBI Rate Hike! Sensex up 500 points, Nifty exceeds 100 points

KEY POINTS OF THE RBI MONETARY POLICY DECISION

  • The repo rate under the Liquidity Adjustment Facility (LAF) increased by 50 basis points to 5.90% with immediate effect.
  • The rate of the permanent deposit facility (SDF) is adjusted to 5.65% and the rate of the permanent marginal facility (MSF) and the discount rate to 6.15%.
  • RBI MPC lowered real GDP growth estimate for FY23 to 7% from 7.2%.
  • MPC decided to stay focused on pulling out of accommodation to ensure inflation stays on target going forward, supporting growth: RBI
  • In order to counter the temporary moderation in liquidity, the 28-day Variable Repo Rate (VRRR) auction merged with the 14-day VRRR auction

VALUATION STRATEGY BEHIND RBI MONETARY POLICY DECISION

Mondial economy: Covid-19, the conflict in Ukraine and aggressive monetary policy actions around the world are weakening global economic activity. This unprecedented tightening of financial conditions is leading to increased volatility in global financial markets triggered by sporadic selling in stock and bond markets and the strengthening of the US dollar to its highest level in 20 years. As a result, emerging market economies (EMEs) face intense pressures from reduced portfolio flows, currency depreciations, reserve losses and financial stability risks, in addition to the global inflationary shock. As external demand deteriorates, their macroeconomic outlook becomes increasingly unfavorable. Also Read – BREAKING LIVE Updates on RBI Monetary Policy: RBI Raises Repo Rate by 50bps to 5.9%

Domestical economy: In the first quarter of 2022-2023, India’s real gross domestic product (GDP) grew by 13.5% year-on-year (y-o-y). Although all components of aggregate domestic demand increased year-on-year and exceeded their pre-pandemic levels, the drag on net exports compensated. Apart from this, on the supply side, gross value added (GVA) increased by 12.7% in the first quarter of 2022-23, with all components registering year-on-year growth and most notably services. Read also – Imminent rate hikes? What to expect Friday from the RBI Monetary Committee meeting from today

Improving supply-side conditions: Data shows that overall supply conditions are improving. The kharif season went rather well with southwest monsoon rainfall, 7% higher than the long-term average (LPA), as on September 29, and its spatial distribution extending to certain deficit areas. As of September 23, area was 1.7% above normal seeded area and only 1.2% below last year’s coverage. Kharif foodgrain production according to the first advance estimate (AWF) was 3.9% lower than last year’s fourth advance estimate (only 0.4% below last year’s AWF). Activity in the industrials and services sectors remains expanding, particularly the latter, as evidenced by the purchasing managers’ indices (PMI) and other high-frequency indicators. However, the industrial production growth index slowed to 2.4% (year-on-year) in July.

Rising demand: Ahead of the holiday season, urban consumption has increased on the back of discretionary spending, and rural demand is also gradually improving. Rising imports and domestic production of capital goods, steel consumption and cement production show that investment demand is also increasing. Merchandise exports posted a modest expansion in August. Non-oil excluding gold imports remained dynamic.

CPI inflation increase: In August 2022, consumer price index (CPI) inflation rose to 7.0% (year-on-year) in August 2022, from 6.7% in July, as food inflation increased, driven by the prices of cereals, vegetables, pulses, spices and milk. Fuel inflation moderated with the reduction in kerosene prices (PDS), although it remained in double digits. Core CPI inflation (i.e. CPI excluding food and fuel) remained stable at elevated levels, with upward pressure on various constituent goods and services.

Excess liquidity of the system: Overall liquidity in the system remained in excess, with average daily absorption under the Liquidity Adjustment Facility (LAF) decreasing to ₹2.3 lakh crore in August-September (until 28 Sep 2022) vs. ₹3.8 lakh crore in June-July. Money supply (M3) increased by 8.9% year-on-year, with aggregate commercial bank deposits increasing by 9.5% and bank credit by 16.2% as of September 9, 2022. India were placed at US$537.5 billion as of September 9, 2022. September 23, 2022.