RBI to pause rate hikes for most of 2023, hold peak policy rate at 6.25-6.5%: Kotak Institutional Equities

• Investors spooked by rate hikes may have something to cheer about as analysts at Kotak Institutional Equities expect the RBI to take a long pause for most of 2023.
• The repo rate could peak at 6.25-6.5%, according to Kotak Institutional Equities analysts, who say that RBI will pause and assess the impact of rate hikes on inflation before its next move.
• Global and domestic headwinds also limit the scope for raising ratings, according to the research firm.

The Shaktikanta Das-led Reserve Bank of India (RBI) is expected to take a long pause from raising interest rates and hold the peak policy rate at 6.25-6.5%, as it assesses the impact of monetary tightening, say analysts at Kotak Institutional Equities. This increases the possibility of the first half of 2023 mirroring much of 2022, with elevated inflation keeping RBI in a watchful mode.

Retail inflation, or CPI-based inflation, declined in November to 5.88% – falling just below RBI’s upper tolerance limit of 6% – from the highs of 7.8% scaled in April this year. In its efforts to tame inflation, India’s central bank has raised the repo rate by a total of 225 basis points this year, taking the interest rate to 6.25%. Analysts at Kotak Institutional Equities expect the central bank to wait to see the full impact of the rate hikes on inflation before it gets back to hiking interest rates.

“We expect the RBI to hold peak policy rate at 6.25-6.5% for most of 2023 as it gauges the impact of monetary tightening on inflation. We model CPI (consumer price index) inflation to stay above 5% for most of FY24 and core inflation to be closer to 6%,” said the research firm.

Core inflation, which is inflation excluding food and fuel, came in at 6.1% in November, up 10 basis points from October.

Overall, the firm expects inflation to remain sticky above 5% throughout FY24.

Indian markets to further consolidate

Indian equities’ strong showing in 2022 so far has made the valuations rich, according to the firm. Overall, the Nifty50 index is up 4% this year, with the banking, financial services and insurance (BFSI) sector leading the gains.

“We expect further consolidation in the Indian market over the next few months as it fully digests the negatives of rich valuations, higher-for-longer interest rates, and growth headwinds,” said the research firm.

It added that there could be a further correction and a gradual de-rating of growth stocks – most stocks outside of the IT sector are yet to correct in line with the higher interest rates, according to the research firm. Further, the report says global and domestic headwinds also limit the scope for raising ratings.

2023 to be ‘year of investments’

Analysts at Kotak Securities said they expect 2023 to be the “year of investments,” suggesting that investors should buy on dips despite the economic uncertainties on the horizon.

“We are of the view that equity and other asset classes such as debt, real estate, or gold may provide investment opportunities during the calendar year 2023, which would give a decent return in the coming 2 to 3 years. We can consider CY23 as the year of investment across various asset class(es),” said Jaideep Hansraj, MD and CEO, Kotak Securities at a webinar.

However, over the short term, investors will have to be a little careful, said Shrikant Chouhan, executive vice president, Kotak Securities. He added that investors should deploy a ‘buy-on-dips’ strategy with a view of over 12 months in order to make meaningful gains on their investments.

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