MPC 5-7 Dec meeting

RBI will announce the MPC decision on Dec 7, 2022. The current repo rate is 5.90%. OIS markets are pricing in 35 bps of rate hike in the Dec policy and terminal rate of 6.5% by June policy which coincides with the peak in Fed fund pricing.

The current liquidity is in surplus with LAF numbers for Dec 2, showing a surplus of 172,000 crore (government spending plus maturity of forward contracts) and weighted average call money rate trading at 5.41% much below the rate of 5.90%.

Wholesale price indices have been declining after the 15.88% peak in the month of May. The oct print came in at 8.39%. The Oct CPI came in at 6.74% (prior 7.45%)

In the meeting of the minutes of the RBI policy of the 28 - 30 Sep, Dr. Ashima Goyal warned of the risks of aggressive tightening of rates as detrimental amid demand uncertainty. With forward real rates being in positive territory and lagged effects of monetary policy, I think her stance will be to hike cautiously and hence a 35 bps hike could be favored by her. Prof Jananth Varma in the last policy had indicated that his view is for policy rates to reach 6% and then pause and assess. His stance is likely to be dovish. Dr. Rajiv Rajan could propose a 50 bps hike on growth resilience and on CBs perseverance to bring the inflation within the tolerance band. Dr. Michael Patra had highlighted the risk from pass through of input cost pressures.

Acc to RBI projections, Q1 FY 23-24, inflation will be at 5% with crude oil price assumption of $ 100/bbl. Global brent crude oil prices at $ 86 / bbl could actually see inflation outturn to be lower. With IMD forecasts of a warm winter, the outlook for food price inflation is uncertain. However, as I've highlighted previously, the trajectory of inflation is lower on seasonality and high base effects. The equity indices are trading at all time highs, the mfg and services PMI showed a healthy expansion coming in at 55.70 and 56.40 respectively. However, the export data for Oct showed a sharp demand contraction.

I think, RBI would take a calibrated approach and increase rates by 25 - 35 bps and then favor to pause to see if the demand momentum continues after the festival surge. Pressure on rates from Fx and crude has subsided. FPI inflows stood at $ 4.8 bn in Nov and crude oil prices at $ 86 / bbl

At the current levels, 1Y OIS is fairly valued and I would like to maintain a neutral positioning at the current juncture. The daily call rate is trading below the repo rate, carry is positive and hence there could be some more juice in receiving OIS.

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