Economic Research Desk

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Morning Market Starter

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25th May 2022  –   09:11 am

Supply side measures to moderate inflationary pressures

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22nd May 2022  –   07:24 pm

Weekly Borrowing and Liquidity Monitor

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18th May 2022  –   07:29 pm

WPI May 2022: WPI inflation inches up led by oil

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17th May 2022  –   03:52 pm

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Reserve Bank of India

The MPC delivered a surprise with an off-cycle policy repo rate hike of 40bps. CRR was increased by 50bps to absorb excess liquidity. Within a month, the lower end of the rate corridor (now the SDF) has increased by 80bps showing the extent of RBI pivot

MPC believed that there were upside risks to India’s inflation trajectory set out in April 2022. RBI had estimated inflation for FY23 at 5.7% in April 2022 (vs. 4.5% in February 2022). While it was a large increase from earlier forecast, actual inflation trajectory is pointing towards an even higher print. We expect CPI inflation at 6.2% for FY23 with upside risks due to higher food, energy and commodity prices

We expect terminal repo rate at 6% with a back-to-back hike in each policy, going ahead. This may be accompanied with liquidity absorption through instruments such as CRR hikes

Federal Reserve

In its policy meeting in April, the FOMC hiked rates by 50bps and announced that QT will commence from June 2022 onwards reflecting a tight labour and upside risks to inflation. The guidance provided was hawkish with a reaffirmation that the central bank will move forward with its tightening plans over 2022.

In the next policy meeting in June, we expect the FOMC to raise the policy rates by 50bps and emphasize that more tightening is likely.

We see a cumulative 250-275bps rate hikes over 2022 followed by 50-75bps worth of rate hikes over 2023. From its QT program, the FOMC is likely to shrink its balance sheet by Usd 522bn in 2022 and USD 1.1tn in 2023.

Bank Of England

In its last policy meeting in May, the BoE raised rates by 25bps to 1% with 6-3 vote within the MPC. The 3 dissenting members voted for a 50bps rate hike. However, guidance provided was dovish with the UK economy projected to contract by 0.25% in 2023.

In the June policy meeting, we expect another 25bps rate hike with a continued dovish guidance.

We think that the BoE is close to the end of its tightening cycle. We see an additional 50-75bps rate hike before the tightening cycle ends. QT could remain in operation over 2022 and 2023.

European Central Bank

The ECB maintained status quo but indicated that it planned to end its balance sheet expansion by Q32022. The Pandemic Emergency Purchases Program (PEPP) has ended while the asset purchases program is due to get wound down by July if that is validated by economic data. However, it left open some flexibility to change course in case Russia-Ukraine poses downside risks to the outlook.

In its next policy meeting in April, the ECB is expected to maintain the guidance that balance sheet expansion will end later in 2022 and update its outlook based on developments in the conflict.

We expect QE to end by July 2022 and policy rates to get hiked by 20-30bps in Q42022. We see a further 30-50bps hike in 2023. We think that balance sheet size will be kept unchanged.

People's Bank of China

The PBOC delivered another 50 bps cut in the RRR in December and cut the one-year loan prime lending rate by 5 bps to 3.8% reflecting ongoing concerns about the real estate sector and the economy.

We see prospect of further liquidity infusions via RRR cuts or OMOs to support the economy as the real-estate sector undergoes a multi-year period of under-performance.

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