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Hawkish, dovish policy puts markets in a tizzy

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The Reserve Bank of India’s Monetary Policy Committee (MPC) left key borrowing rates unchanged. That was the dovish part. However, most members voted to withdraw an ‘accommodative’ credit policy stance with an eye on inflation. That was the hawkish part.

Financial markets were quick to react to the dovish part. The 10-year bond yields fell 1%, reacting to the pause as media reports suggested most analysts anticipated a 0.25% increase in policy rates. The NSE Nifty and the S&P BSE Sensex jumped from the day’s lows.

What’s brewing?

The hawkish-dovish policy stance means there are red flags ahead for financial markets. There is a spike in international oil prices already. Pundits are talking about oil prices surging to $100 per barrel from $80 per barrel. For every 10% increase in the Indian crude oil basket price, domestic inflation rises 0.3%. It slows down the economy shaving off 0.15% from the growth rate. The RBI mentions all that statistics in the monetary policy statement. The message from the RBI is that in the short term, the inflation threat may decrease a bit. However, it lurks around regarding potentially high oil prices going forward. That means it is not yet the end of the rate ‘hike’ cycle.

As an investor, you may wonder about the impact going forward. Your focus needs to be on the outlook for growth and corporate profits.

The RBI policy statement projects a GDP growth rate of 6.5% in 2023-24 and 2024-25. While some analysts expect growth rates to decline in 2023-24, the assumption means a lot to businesses riding on India’s economic growth. Domestic financial services, consumer companies, construction and infrastructure businesses, hotels, tourism and other sectors that rely on economic growth would do well over the next 12-24 months.

The slowdown and the economic uncertainty in the US and Europe could trigger a slowdown in the services sector. The RBI policy seems to be pinning hope on India’s domestic economy to drive growth.

From an investment standpoint, India’s banking and corporate balance sheets show resilience.

Credit rating agency CRISIL said that the credit ratio of upgrades to downgrades moderated in the second half of 2023 but is higher than the 10-year average. That means the credit outlook for more companies remains more optimistic than before. That is good news from an investment standpoint.

CRISIL highlights automobile, hospitality and dairy products sectors to grow operating cash flows faster than others. The agency also expects infrastructure sectors like highway tolling, renewables and construction sectors to show favourably to stable credit profiles. That means domestic growth is expected to enhance the balance sheets of these sectors further.

India’s banking sector is also expected to do better, with most of the loans on the books at a floating rate. There is also an uptick in non-food credit growth. “Growth in non-food bank credit accelerated to 15.4% as of end-March 2023 from 9.7% a year ago,” RBI said in the monetary policy committee note.

You must put your weight behind businesses that ride on India’s growth story. To identify such stocks, you can use Alphaniti.


RBI Monetary Policy Report: April 2023

India Inc’s key credit ratio moderated sharply in second half of FY23: Crisil Ratings

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