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UFI-05.06.22

ICICI Bank’s weekly UFI1 had a marginal moderation to 111.4 vs. 111.8 the week before. 

View chart
05 Jun 22 09:00 AM

CENTRAL BANK ZONE

Reserve Bank of India

MPC kept the repo rate unchanged at 6.50% (4:2 vote versus 4:1 earlier) with policy stance retained at ‘Neutral’. However, CRR was cut by 50bps to 4% to support liquidity. Growth projection for FY25 has been revised lower to 6.6% (7.2% earlier) with growth now projected at 7% in H2 as against 7.4% earlier. While high frequency indicators point to recovery, growth is expected to settle around 6.5% in H2 thus implying FY25 growth at 6.3%
Even as RBI has been revising growth projections lower, inflation projections have been getting revised higher due to food inflation. Q3 inflation is now projected at 5.7% and Q4 at 4.5% with H1 inflation settling at 4.3% (4% earlier). This trajectory is far more likely and implies real rate of 2%. Durable and system liquidity backdrop has changed from Oct when both peaked at INR 4.9tn and INR 2.7tn respectively because of FX outflows. Given demand for currency in Q4, RBI has injected durable liquidity via CRR cut. Given large short forward positions, more may have to be done later
RBI Governor emphasized on timing of policy making and restoring balance between growth and inflation. We believe Feb would be an opportune time for MPC to cut rates by when inflation would be moving in-line with projections and growth could have some downward bias. We see a shallow (50bps) rate cut cycle. What can delay rate cuts? First, another food price shock. Second, global events (higher US yields, stronger dollar and FPI outflows) could turn adverse

Federal Reserve

In its policy meeting in September, the FOMC eased policy rates by 25bps in November while it maintained its data-dependent guidance. The Fed Chair emphasized that more easing could be required to bring the policy rate towards its neutral level.
The FOMC is expected to cut rates by 25bps in the December policy meeting, although it remains a close call. The FOMC is expected to signal to the market that it will resort to a staggered easing path.
We expect aa further cumulative 100bps worth of easing over 2024 and 2025 resulting in a terminal rate of 3.50%-3.75%

Bank of England

In its policy meeting in November, the BoE cut policy rates by 25bps and re-affirmed that it will resort to a staggered easing profile.
In its next policy meeting in December, the BoE is expected to maintain status quo while providing an unchanged guidance.
The BoE is expected to cut rates by a cumulative 100bps over 2025 and a further 50bps over 2026.

European Central Bank

In the policy meeting in October, the ECB cut rates by 25bps while it maintained its data-dependent guidance. However, it indicated that further easing could continue reflecting concerns about the growth outlook.
In its policy meeting in December, concerns about disinflation and growth could prompt the ECB to cut rates by 25bps.
Our base-case for the ECB the policy rate by a further cumulative 125bps resulting in a terminal rate of 1.75%.

People's Bank of China

The PBoC announced: (a) a reduction in the seven day repurchase reference rate by 30bps, (b) cut in the one-year MLF rate by 30bps, (c ) cut in the RRR by 50bps with a possibility of a further 50bps cut, (d) excluding rural banks from RRR and (e ) cut in the minimum down-payment ratio from 25% to 15%.
We expect a further 25bps-50bps worth of rate cuts and RRR cuts of an additional quantum of 50bps in the seven day repurchase agreement.
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