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MOSL: ECOSCOPE: 2QCY22 – India’s quarterly economic outlook; Terminal repo rate could be 5.5%

The economic situation has changed dramatically since our last Quarterly Economic Outlook (QEO) published in Mar'22. The continuation of hostilities between Russia and Ukraine has led to an entrenched episode of higher inflation across the globe. Accordingly, many central banks have significantly hiked their policy interest rates in 2QCY22, in contrast to marginal monetary tightening seen until 1QCY22. This led to sharp reactions across global financial markets (equity, bonds and currency) and meaningful changes in global economic forecasts.

• The Reserve Bank of India (RBI) has been no different in that respect. Growth was given explicit priority over inflation till Dec'21. As RBI kept the repo rate unchanged in its Apr'22 monetary policy, a hike of 0.9pp in the past two months (including an out-of-turn monetary policy in early May'22) to 4.9% in early-Jun'22 was totally unexpected.
• Notwithstanding such sharp monetary tightening and rising concerns with regard to the global environment, what's surprising is that RBI has kept its FY23 real GDP growth forecasts unchanged at 7.2% in its Jun'22 monetary policy, same as market consensus. In contrast, we peg FY23 real GDP growth ~6.3%, slightly lower than the 6.4% projected earlier.
• Although we expect inflation to stay high (~7%) till Dec'22, a large part of this is driven by global factors, called 'imported inflation'. We expect the terminal repo rate to be 5.5%, implying additional hikes of 60bp in FY23. We expect policy rates to remain largely intact in FY24.
• The INR touched 79 against the USD from 74-75 at the beginning of CY22. Based on global sentiments and trade deficit, the USD:INR could touch 80 in 2HCY22. Nevertheless, it is unlikely to sustain at that level. We expect it to strengthen in CY23/FY24.