Sunday, June 4, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

What Will the RBI Do?

We’re back to the time when all eyes move to interest rates. The RBI is set to start its three-day meeting on June 6.

What happened the last time?

The last RBI meeting was in April 2023, when it left rates unchanged at 6.5%. The pause came in after the RBI hiked rates by a cumulative 250 bps since May 2022.

While it left rates unchanged, the RBI also retained its stance of focusing on ‘withdrawal of accommodation’, and made it clear that the pause was only for the April 2023 meeting, and that the RBI would act whenever needed - tilting towards an overall hawkish commentary.

What’s happened since then?

• Since the last RBI meeting, the markets are up 5%. Boosted by both domestic and foreign investors, in the last quarter, India has been the top performing emerging market
• India’s retail inflation is at a 18-month low to 4.7% in April 2023, from 5.7% in the previous month. The number is finally in RBI’s tolerance band
• Possible risks to inflation from El Nino seem to be restricted given the early outset of the monsoon, and IMD’s expectations of rainfall being at 96% of the long term average
• The economy seems to be going strong as the 4QFY23 GDP shot up to 6.1% from 4.5% in the previous quarter, and 4% in the same quarter last year. This took the FY23 GDP to 7.2%, making India the fastest growing large economy, and setting strong momentum for FY24

What will the RBI do now?

Cutting rates seems to be out of question given the fact that inflation has just about come into the comfort zone, economic activity is already strong, and there isn’t enough data domestically or globally to settle on the view that inflation is controllably and sustainably down.

Raising rates seems a little unnecessary given the downward trajectory of inflation. Covering relative rate differentials could provide a reason to raise rates. However, even that seems unlikely given uncertainty on the Fed’s direction and strong flows.

That leaves us with a status quo, which seems like the most likely path RBI will take.

What about the markets?

The change in the direction of the markets aligns with the RBI’s policy decision in April 2023. The markets already seem to be factoring in a prolonged unchanged status on rates, and no hikes, given the sharp rebound, and outperformance.