RBI Likely To Hike Repo Rate By Another 100 bps In The Remainder Of FY23

With RBI due to announce its monetary policy on 5th August, CareEdge expects the Central Bank to hike the policy interest rate by another 100 basis points in the remainder of FY23. This will take the terminal rate to 5.90% by the end of FY23. While the current CPI inflation is still around 7%, the easing of many commodity prices is attributed as a major factor of influence towards lower inflation trajectory by the fourth quarter of the FY23.

Rajani Sinha, Chief Economist, CareEdge - "With the softening of many commodity prices, CPI inflation seems to have broadly peaked at the current levels and expected to witness a downward movement to below 6% by Q4FY23. However, domestic inflation is still high and so is the global commodity prices, we expect RBI to continue with front-loading of rate hiking cycle. We expect 50 bps of repo rate hike in the upcoming policy and another 50-bps rate hike post that taking the terminal repo rate to 5.90% by the end of the fiscal year."

10-year G-Sec yield to rise to 7.50-7.75% by the end of the fiscal year

"The outstanding liquidity surplus in the banking system has reduced to Rs 0.8 lakh crore by July from a high of Rs 6.2 lakh crore in end-January. This has resulted in steepening of the yield curve, with the 10-1 year G-Sec spread reducing to 1.10 percentage points (pp) in end-July 2022 from 2.18 pp at end-January," CareEdge has said.

With forex inflows reducing and with credit offtake picking up, the liquidity in the system is likely to remain tight, which will keep the yield curve steep. This will also enable better transmission of the policy rate hikes by the Central Bank. CareEdge expects 10-year G-Sec yield to rise to 7.50-7.75% by the end of the fiscal year.

Rajani Sinha, Chief Economist, CareEdge - "Last year, we saw the corporate bond spread reducing on low corporate bond issuances. In FY22, corporate bond issuances fell by 24% compared to the previous year. However, we feel the corporate bond issuances are likely to improve in FY23 on the back of some pick-up in investment demand. The rise in bank lending rates should also result in some credit demand moving to the corporate bond market, going forward. This should result in higher corporate bond yields and widening of corporate to G-Sec bond spread."