Rate hikes in the last stretch, weak November data, Rising FX reserves and more...
This Week In Data #24
So, yet another rate hike from the RBI. Although the quantum of the hike – 35bps – was lower than the last few occasions. And that suggests that we are perhaps getting to the end of the rate-tightening cycle. However, we are not at the end. The fact that the MPC continued with the phrase that it had ‘decided to remain focused on withdrawal of accommodation’ suggests that at least 1 more rate hike is on the cards in February – unless things change dramatically between now and then. It is also worthwhile to note that the policy rate has already seen a 225bps increase in less than 9 months. The Repo rate was last at 6.25% in March 2019.
This was the negative surprise of the policy. After the last rate hike in late September, 2 of the 6 members of the MPC suggested that it was time to contemplate a pause to see how the rate hikes so far are playing out. However, it looks as if in this meeting, neither side budged. The two ‘doves’ argued for caution with one voting against the rate hike. But equally the other 4 unwilling to change their side and hence the forward-looking phrase from the resolution (see in bold above) has remained unchanged. The lower quantum of the rate hike is the only ground that the hawks ceded to the doves.
But a lot can change between now and in early February when the MPC meets next – both domestically and internationally. For one, there will be two inflation readings before the next MPC meeting (November and December). The November CPI data to be released on Monday is likely to show CPI inflation having moderated further to 6.4% from 6.8% in October. In January we will also get the first advance estimate of GDP for the current year (FY23) and also the first revised estimate of GDP for FY22. The Union Budget will also be presented on the 1st Feb, before the next MPC. Globally, there will be two meetings of the Federal Reserve before the next MPC meet and if the Fed were to suggest that it is also at the end of its rate hikes, then that will be a major for the RBI. So, while a further 25bps rate hike is likely, it is not a given.
Meanwhile, some of the initial growth data for November has been a bit weak. While EWay bills grew 30% in November, the high growth was due to the Diwali timing effect. If we look at October-November together the growth was 17% YoY, and it is the lowest since March. Similarly, the freight carried by the Railways increased just 3.2% YoY during October-November, the slowest growth in over 2 years. The cargo traffic handled at the major ports grew just 2% YoY in November which is the slowest growth since March.
That said end consumption momentum remains strong. Car sales grew 19% YoY and 2W sales grew 15% YoY in November, despite November last year being the Diwali month. On the rural side, Rabi acreage continues to trend higher on a YoY basis (except Pulses) and demand for work under NREGA continues to decline sharply on a YoY basis suggesting increased availability of non-NREGA work.
Another slight worry was the sharp deceleration in Mutual Fund inflows. Inflows into domestic Equity funds moderated sharply to just ₹23bn in November, the lowest since April last year. Hybrid funds saw outflows of ₹65bn, the sixth consecutive month of outflows. However, SIP flows remained strong and reached another record.
Lastly, FX Reserves rose by just over US$11bn during the week ended 2nd December. This is the fourth consecutive week of an increase in reserves. Media reports suggest that a large part of this increase was the RBI purchasing USD from the market. From the low of US$525bn in October, FX reserves have now increased by over US$36bn in the last six weeks. However, the rupee has appreciated by just 1% against the USD from its recent lows. And this suggests that the RBI is, for now, comfortable with the rupee’s level and is more focused on shoring up its reserves rather than allowing the rupee to appreciate.
Have a good weekend folks…