Nilesh Shah: The market will be priced in a 25bp rate hike in the next six months: Nilesh Shah

“The Reserve Bank of India (RBI) is raising interest rates on a preload basis because growth elasticity is good. If there are rate increases, GDP growth instead of 7.2% could be 7.4% or 7.5 Nilesh ShahMD, Kotak AMC

How do you see the path of inflation in the future? Have we already seen the worst and may not have seen the 7% mark going forward?
It seems so with the correction in commodity prices and even the correction in oil prices finally. So with good monsoons, lower commodity prices, and lower oil prices, it is fair to assume that we have seen peak inflation and as the Reserve Bank of India forecast, somewhere near Q4FY23, the inflation reading will be below the upper band of the Bank of India’s target range. Indian reserve.

The biggest thing that distinguishes the RBI as compared to many other central banks is that the RBI is bringing inflation under control while keeping the growth rate high. India will be the fastest growing major economy in fiscal year 23, while many other central banks are looking for recession to strengthen their economy to control inflation. Yesterday, we saw the Bank of England announce a recession as well as rising inflation. It is clear that the Reserve Bank of India has kept the Indian economy flying high in turbulent weather while many of their other peers are actually making a hard landing for their economy.

Where do we go from here? We were expecting a slightly more pessimistic comment and there was some kind of confusion this time around. Do you expect the rate hike cycle to drop to at least 25-35 basis points in the future?
It is very likely that we will see an interest rate hike of 25 basis points in the future. The final repo rate was earlier somewhere around 6-6.25% but the easing of inflation for the past month has brought it down to 5.75-6%. So we’re already at a level with that 50bp hike and we can afford a 25bp rate hike over the next six months. There is no doubt that the market will raise the interest rate by 25 basis points in the future.

If we start from the RBI rate-raising cycle from May to August, in four months we have seen a rise of 140 basis points which is by no means to be reckoned with. However, GDP estimates as well as inflation estimates except for one quarter, are completely unchanged. So is it as if monetary policy doesn’t really make a difference? Is monetary policy important at all?
There is no doubt that monetary policy is important and as I said correctly, the transmission of monetary policy in India takes about two to three quarters and what surprised us is the resilience of the Indian economy. The weak spot for the Indian economy was consumption at the end of the March quarter 2022 and sales of consumer goods fell by 4.1%, luckily for the June quarter it was negative but only 0.7%.

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Government spending was good. Private capital expenditures are recovering. The monsoon was good except for some areas in the North and Northeast. Generally, RBI allows rate hikes on preload basis because growth elasticity is good. If there are interest rate hikes, GDP growth instead of 7.2% could be 7.4% or 7.5%. Therefore, there is a rollback by forward loading of interest rates but this is to ensure that inflation targeting in India continues to operate. We are now quite confident that in the last quarter of FY23, the RBI’s upper band of 6% will see an inflation reading lower than that.

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