RBI hikes key rate to tackle inflation but sees rural consumption improving

In what could potentially be another sentiment dampener, the Reserve Bank of India has hiked the repo rate, the key policy rate, yet again by 50 basis points to 4.9 percent to tackle inflation. In consonance with the RBI Monetary Policy Committee’s objective of achieving the medium-term consumer price index (CPI) inflation target of 4 percent, it needs to be seen how the series of rate hike will impact buying trends in the auto sector.

However, the central bank maintains that “the recovery in domestic economic activity is gathering strength. Rural consumption should benefit from the likely normal south-west Monsoon and the expected improvement in agricultural prospects. A rebound in contact-intensive services is likely to bolster urban consumption, going forward. Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push and strengthening bank credit.” Taking all these factors into consideration, RBI retained in FY23 real GDP growth projection at 7.2 percent.

The two-wheeler industry, battling the challenge of muted demand from the rural areas and the entry level segment especially could look at potential positives in the RBI outlook forecast of an uptick in growth trends.

According to the MPC’s outlook, the global geopolitical tension and the resulting surge in commodity prices has led to significant uncertainty in the domestic inflation outlook. Consequent to the recent reduction in excise duties, domestic retail petroleum prices have moderated slightly. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices. This is particularly of relevance for the auto sector grappling under the double whammy of high fuel prices along with supply side headwinds.

Early results from manufacturing, services and infrastructure sector firms polled in the Reserve Bank’s surveys expect further input and output price pressures going forward. Taking into account these factors, and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7 per cent in FY23, with Q1 at 7.5 percent, Q2 at 7.4 percent, Q3 at 6.2 percent and Q4 at 5.8 percent, with risks evenly balanced.