Morgan Stanley revises expectation from upcoming RBI policy

Mumbai: Reserve Bank of India is expected to post a 50 percentage point increase in its upcoming policy review in September even if the bank keeps its end-of-term repo rate forecast at 6 .5%, according to economists at Morgan Stanley Research.

In a note written by economists Upasana Chandra and Bani Gambhir, the researcher said that they have estimated the policy rate in the upcoming policy will increase by 35 basis points. However, fixed inflation and the hawkish stance of other central banks warrant a shift in expectations.

“We believe the normalization of the real exchange rate is warranted in a challenging external environment,” it said. “We believe in its September 30 review, the Monetary Policy Committee (MPC) is likely to increase the repo rate by 50bp, to 5.9%, with its view unchanged,” it said. . The MPC will meet again from September 28 to 30.

Inflation has been capped in the 6-7% range since January 2022. Morgan Stanley expects inflation to continue to remain in the 7.1-7.4% range in September, driven by food prices. increase according to the high frequency food price trend. It then expects the trend to correct but remain above 6% through February 2023.

“Risks to the inflation outlook are skewed in the opposite direction due to uncertainty around the trajectory of food inflation (sowing rice, lower pulse y/y), changes on global commodity prices and the possibility of import inflation if exchange rates weaken amid a stronger dollar. .

Even if global commodity prices continue to remain above pre-pandemic levels, Morgan Stanley expects the current account deficit to hit a near 10-year high of 5% of GDP by the end of September-22. “While the CAD rallied, FII inflows diverged in August, coupled with FX intervention by the RBI (foreign reserves down $20.8 billion since the end of July) helped keep the currency stable. We expect CAD to shrink about 3% of GDP in QE on December 22,” it said.

That suggests high-frequency domestic demand indicators are reflecting a continued broad-based recovery. The slowdown in global growth is reflected in the trend of moderate export growth. Good domestic demand will likely partially offset the decline from abroad. We forecast GDP growth at 7% in year 23 and 6.4% in year 24,” it said.

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