Morgan Stanley expects inflation to remain sticky around 7.1-7.4% in September
Recent reports by Morgan Stanley state that the Monetary Policy Committee in the September credit policy is likely to increase the repo rate by 50 basis points to 5.90 percent and will keep its stance unchanged.
“We were earlier expecting a 35 bp increase, however, sticky inflation and continued hawkish stance of DM central banks, warrants continued front loading of rate hikes, in our view,” the report said.
The inflation is ranging above the upper tolerance band of the Reserve Bank of India (RBI) for the eighth straight and therefore Morgan Stanley too expects inflation to remain sticky around 7.1-7.4 percent in September as well, driven by increases in food prices as per high-frequency food price trend.
Thereafter, we expect the trend to moderate but remain above 6 percent until January/ February 2023. Risks to the inflation outlook are skewed to the upside due to uncertainty around food inflation trajectory (sowing for rice, and pulses is lower YoY), changes in global commodity prices, and the possibility of imported inflation if the exchange rate weakens amid dollar strength, the report added.
Going forward, the key to track in the policy will be:
- Changes to growth or inflation forecast. While incoming inflation data is along expected lines, growth for QE Jun was a tad below our expectations (even RBI’s projections).
- Comments around comfort on the external balance sheet in the context of external risks.
- The overall tone of the policy statement and path on real rate normalization.
The RBI has lifted the repo rate by 140 basis points and surplus liquidity has fallen significantly (now $19.1 billion from $89 billion in January 2022), pushing the weighted average call rate to 5 percent from 3.5 percent in April.
However, the normalization in real rates has been less stark, with real policy rates at -1.6 percent currently vs. -3.8 percent in April. The external environment remains challenging, with generally higher commodity prices vs. the pre-pandemic, stronger dollar, and continued hawkish response from DM central banks. While domestic macro fundamentals are strong, risks from continued elevated commodity prices need to be tracked.
Against this backdrop, we expect monetary policy normalization to continue, pegging the terminal repo rate at 6.5 percent by February 2023. Risks seem skewed to the upside for the terminal repo rate driven by external factors, which could potentially keep inflation higher for longer.
[With Inputs from IANS]
PGurus is now on Telegram. Click here to join our channel and stay updated with all the latest news and views
For all the latest updates, download PGurus App.
