The repo rate is expected to remain at 6.5 per cent for the rest of Calendar Year (CY) 2023, because inflation is likely to be lower than the Reserve Bank of India’s current projections, according to ICICI Securities.

The RBI’s monetary policy committee (MPC) raised the policy repo rate by 25 basis points from 6.25 per cent to 6.5 per cent, 78 basis points above the latest CPI inflation print of 5.72 per cent for December 2022.

Read more: RBI survey shows overall improvement in economic parameters

ICICI Securities (I-Sec), in a report,said: “Although we believe that inflation will be lower than the RBI’s forecasts for the next 14 months, we are altering our own forecast for the repo rate. Whilst we previously expected a rate cut in July-September 2023, we now expect no change in the repo rate for the rest of CY23.”

High forecast on crude oil

It noted that the RBI estimates 5.7 per cent inflation in January-March 2023, based on a surprisingly high forecast of US$95/barrel (bbl) for the Indian basket crude oil price.

In the first 5 weeks of the quarter, the Indian basket price was at US$80.9/bbl.

“The lower oil price, and well-contained food inflation should ensure headline CPI inflation to average 5.3 per cent YoY (year-on-year) in January-March 2023, and the lower price level should contain inflation at 5.1 per cent YoY in H1FY24 and 5.3 per cent in H2FY24 (building in buffers for a sub-normal monsoon),” said Chief Economist Prasenjit K. Basu.

Basu observed that the Indian economy will also receive an unusual stimulus from the real effective depreciation of the Rupee (INR since mid-November 2022.

REER fillip to exports

He assessed that while the REER (real effective exchange rate) normally appreciates about 1 per cent a year (because India’s inflation rate is higher than the weighted inflation rate of its trading partners), it depreciated 5 per cent YoY in CY22 -- most of the real effective depreciation coming in the final 6 weeks of the year.

This is likely to provide a substantial lagged fillip to India’s exports of goods and services over the next 6-9 months – and also deter imports by making them costly relative to domestic producers.

“The rebound in India’s foreign exchange reserves in December 22-January 23 suggests that the NEER (net effective exchange rate) depreciation was policy-induced.

“Tighter monetary policy will curtail further depreciation, but the stimulus from the 3-month fall in the REER will provide an ample boost to the external sector in H1FY24,” Basu said.

On early monetary stimulus

Basu observed that now CPI inflation is within its targeted range (and WPI inflation is even lower, at 4.95% YoY in December 22), the RBI’s statements (and Governor Shaktikanta Das’s remarks) frequently refer to the need to “break core inflation persistence” -- although the RBI officially targets headline rather than core CPI inflation.

“The hawkish RBI now prefers to err on the side of caution, and is more determined to achieve the 4 per cent inflation target (rather than merely keeping inflation within the 2- 6% range), while also seeking to bring core CPI inflation below 6% YoY.

“Given its real GDP growth forecast of 6.4% for FY24 (a stand-out performance in a year in which the western world is set to be in recession), and bank credit already growing 16.7% YoY in Jan’23, the RBI sees no need to provide an early monetary stimulus – especially since fiscal policy is already spurring a pickup in investment spending,” he said.

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