RBI MPC: Experts have their say on latest announcements by Das and his team
5 min read . Updated: 08 Feb 2023, 12:13 PM IST
Premium- Shaktikanta Das said that the inflation-adjusted, real interest rate remains below pre-pandemic levels and liquidity remains surplus, even though it is lower than during the pandemic.
The Reserve Bank of India hiked its key repo rate by a quarter percentage point on Wednesday as expected but surprised markets by leaving the door open to more tightening, saying core inflation remained high.
The central bank said that its policy stance remains focused on the withdrawal of accommodation, with four out of six members voting in favour of that position.
Here is what the experts have to say after the latest hike in key repo rate by RBI:
RBI Credit policy is on expected lines. Major indicators showing stability. Growth of 7% for current year and 6.4% for FY 24. Inflation also seems to be within range and for current year of 6.5% and coming down to 5.3% in FY 24. Both on front of Currency performance and FX reserves are in better condition. Overall policy as per market expectations, said Kamlesh Shah, President, ANMI.
“The 25 basis points rate hike by the Reserve Bank of India today has been in line with the consensus expectations. We, however, felt the possibility of a rate pause this time around was at least 50%. On the inflation front, the major softening in India post April 2022 was there main reason for us to expect a standstill in this policy. On the contrary, the Reserve Bank of India seems to have been more bothered about the high and sticky core inflation for more than a year. More importantly, the continued rate hikes by the Bank of England, the ECB, and the US Federal Reserves and the implications of these in the foreign exchange market influenced the decision of the Reserve Bank of India to go for another rate hike. Unless there is an unexpected flare in inflation, we would expect the Reserve Bank of India to maintain unchanged policy rate for the remainder of 2023. This would be positive both for the debt and equity markets," said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers on the reasons for the hike.
On expected lines, the RBI has gone in for a smaller dose of a repo rate increase by 25 basis points taking into account the moderation of inflation but a continued vigil is required on core inflation.
The overall stance has been maintained and not yet shifted to neutral indicating the approach RBI to take calibrated steps to Meet the challenges of the growth vs inflation matrix, said Narinder Wadhwa, President at CPAI.
The persisting uncertainties and volatile global scenario have prompted the RBI to revise downward the next year's GDP growth rate to 6.4% which is however still well comparable with peers. The stock market is expected to respond positively to the measures announced by RBI, with the underlying resilience of the economy being at the forefront. The RBI has also announced measures to widen the government securities market by amending the mechanism of lending and borrowing of government securities which will also provide depth to the market and facilitate smoother government borrowings for the next financial year. The banking sector is also expected to respond positively with healthy credit growth and a positive real rate of interest to the depositors. Overall a pragmatic approach was adopted by RBI with the intent to have an immediate focus on inflation while supporting growth in the medium term, said Jyoti Prakash Gadia, Managing Director at Resurgent India.
RBI-MPC voted to increase the repo rate by 25 basis points to 6.5 percent this seems to be final rate hike with inflation under control in coming days which is targeted for 4 % in 2024 we could see rate reduction in later part of this year .there can cheer in the capital markets
The RBI has decided to hiked the repo rates by 25 basis points in Feb Meeting and now the Repo rate stands at 6.5% which is in line with the street expectations. Since May last year, RBI has hiked the repo rate by 250 bps to bring down the inflation to target levels. The possibility of a soft landing has increased in the US while inflation has come down on account of softening in commodity prices from peak and also on account of base effect now. India will continue to grow domestically at a robust pace of around 6.5% while inflation will be well under upper range of RBI tolerance band of 6%. Now that we are nearing the peak of interest rate hike cycle, we will see some slowdown in discretionary consumption as effect of interest rate hike will kick-in. Till the time we get into a interest rate cut cycle, demand slowdown will be a challenge for next two to three quarters. From then onwards we will see a cool down in inflation, coupled with pent up demand to pull back the consumption industry back on track. In near term, budgetary stimulus due to change in personal tax rates and good sowing of Rabi crop will support rural and urban consumption while Government’s focus on Capex will sustain infrastructure growth in the economy. RBI commentary and announcement is mostly in line with street expectations and thus we don’t see any material impact on the economy from RBI rate hike decision. Inflation is expected to be around 5.3% in FY24 while real GDP growth to average around 6.4%, thus repo rate is expected to peak around 6.7% for this rate hike cycle.
The market’s momentum depends on how much the rate is hiked relative to expectations. Surprises generally follow with volatility in the market; however, RBI has hiked the rates hike by 25 bps as per the market expectations. When the interest rate rises, it impacts both the economy and the stock markets because borrowing becomes more expensive for individuals and businesses, having a ripple effect across sectors. Higher interest rates mean terminal values are lower as the discount rate used for future cash flow is higher.
The financial sector has historically been among the most sensitive to changes in interest rates. Typically, during a rising interest rate scenario, the banking sector passes on rate hikes through the floating rate loans while delaying the rate hikes for deposits, benefitting from spreads, and expanding margins. Banks report strong topline growth due to healthy disbursements, higher loan rates, and robust earnings growth on the back of promising advances. A change in stance to dovish going forward by RBI will lead to rally in the banking segment while a prolonged hawkish stance will impact deposit rates and lead to narrowing NIMs, more so for PSBs. Overall, economy seems to be in good shape and a peak rate of 6.7% is not an unusually high number for domestic markets, thus we don’t see any material impact on the stock market but second order consumption impact we will watching closely, especially on the consumption side, said Anil Rego- Founder and Fund manager at Right Horizons PMS.
