We expect RBI to implement final rate hike in February and change stance to neutral: Morgan Stanley

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New Delhi: The fiscal prudence highlighted in the Budget document for 2023-24 along with consistently moderating inflation are indications that the Reserve Bank of India may opt for a final repo rate hike in its February monetary policy meet, said Morgan Stanley in a report.

India's fiscal deficit has been steadily declining from 7.3 per cent in 2020-21 to 5.9 per cent budgeted for 2023-24. In 2022-23, it was pegged at 6.4 per cent. Finance minister Nirmala Sitharaman reiterated that the government is committed to reducing the fiscal deficit to 4.5 per cent of GDP by 2025-26.

"...the Budget maintains fiscal prudence and the inflation trend is moderating, so we expect the RBI to implement a final rate hike in the February policy review and change its stance to neutral," the report titled "India Economics and Strategy: F2024 Budget: 'Good' Growth Budget" which was authored by Upasana Chachra, Ridham Desai, Sheela Rathi, and Bani Gambhir, said.

The next RBI policy review is scheduled during February 6-8, 2023.

In its December monetary policy committee meeting, the RBI raised the policy repo rate by 35 basis points (bps) to 6.25 per cent.

The MPC's hike in repo rate, the rate at which the RBI lends money to all commercial banks, was the fifth consecutive hike by the central bank. The central bank has been hiking the key policy rate since May to cool off domestic retail inflation that has stayed above the RBI's upper tolerance limit of 6 per cent for over three quarters until October 2022.

Meanwhile, retail inflation was back to the RBI's comfort zone in November 2022. India's retail inflation rate based on Consumer Price Index declined to 5.88 per cent in November from 6.77 per cent during the previous month.

India's wholesale inflation based on the Wholesale Price Index for the month of December 2022 was at 4.95 per cent (provisional), against the previous month's 5.89 per cent.

In October, it was at 8.39 and has been falling since then. Notably, the wholesale price index (WPI)-based inflation had been in double digits for 18 months in a row till September.

Morgan Stanley report said it remains constructive on domestic demand strength, citing capital expenditure and employment creation announcements in the Budget.

The sharp increase in capital spending in a year of global uncertainty, a credible fiscal consolidation, no change in the capital gains tax regime, and lower-than-expected market borrowings augur well for stocks, the report said.

"Our overweight sectors: Financials, Discretionary Consumption, and Industrials. We remain underweight on global sectors and defensives except Technology," it added.


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