Markets remain choppy as RBI cuts GDP forecast, expects inflation to remain high

• Benchmark indices decline, as RBI remains focused on inflation and growth projections see further cuts.
• Adding to inflation woes, RBI governor Shaktikanta Das said that, “Over the next 12 months, inflation is expected to remain higher than the inflation 4% target.
• GDP growth forecast for 2022-23 cut to 6.8% from 7% earlier.

The Indian equity market remained choppy on Wednesday, after the Reserve Bank Of India hiked rates by 35 basis points and cut GDP forecast for FY23. The central bank expects inflation to remain elevated for next 12 months. The central bank’s stance has also dampened sentiments. RBI has maintained a stance as 'withdrawal of accommodation'. The market will now shift to growth, as rate hikes are not yet over.

RBI governor Shaktikanta Das said that, “Over the next 12 months, inflation is expected to remain higher than the inflation 4% target.” Further, Das added that RBI would keep ‘Arjuna’s eye on inflation’.

Also, the central bank cut its real GDP growth forecast for 2022-23 to 6.8% from 7% earlier. “Even after this revision in our growth projection for 2022- 23, India will still be among the fastest growing major economies in the world,” he said.

Benchmark index Sensex was down by more than 200 points after the policy announcement at 62,424 while the 50-stock Nifty was 71 points lower at 18,574.

"The RBI has given a “Main Hoon Na” (we are there) policy, reassuring the market. In a world where central banks are fighting to regain credibility, the RBI stands tall managing conflicting objectives of growth and inflation admirably,” said Nilesh Shah, MD at Kotak Mahindra AMC-

Today on December 7, RBI hiked interest rates by 35 basis points to 6.25%, which was largely in line with market expectations. Repo is the rate at which the central bank lends short-term funds to banks.

“RBI raised the repo rate by 35 basis points, which is in line with expectations, but the tone of the governor was hawkish. With the GDP forecast cut, he kept the inflation forecast at 5.7%. The market was expecting the governor to signal that the rate hike cycle is coming to an end, but this policy shows no signs of it. However, the market is not reacting much to the policy. It may not be a market event with intraday volatility,” said Parth Nyati, founder at Tradingo.

Shares of private sector banks, FMCG and real estate companies gained post the RBI policy outcome while automobile, IT and metal stocks slipped lower.

More rate hikes going ahead
Further, analysts expect one more rate hike starting next year as RBI’s fight against inflation continues. “The Governor made it clear that the fight against inflation will continue, while India's growth remains more resilient. It is, thus, clear that there will be at least one more rate hike of 25bp in CY23,” Nikhil Gupta, chief economist at Motilal Oswal Financial Services group.

RBI has been on a rate hike spree the entire year to fight elevated inflation with five hikes this year, starting with a 40 bps hike in May this year, followed by three consecutive 50 bps hikes each in June, August, and September.

In spite of all the efforts, retail inflation has remained above the central bank's comfort level during the year.

“The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions,” said Das in his monetary policy statement.

“India is seen as a bright spot in an otherwise gloomy global outlook but global spillovers continue to impart volatility,” RBI governor Shaktikanta Das said. Das added that, “Growth in India remains resilient in such a hostile environment,” added Das.


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