RBI policy this week. What investors should expect as another rate hike likely in store
- If RBI decides on a stringent policy tightening, the market mood can swing bearish, as per stock market analysts
Surging inflation, amplified by the Russia-Ukraine war, along with faster Fed rate hikes has triggered a hawkish pivot by the Reserve Bank of India (RBI). In a surprise move, RBI raised the repo rate by 40 basis points to 4.4% last month in an off-cycle hike, its first increase in borrowing rates since August 2018.
RBI Governor Shaktikanta Das-led MPC is expected to increase the key lending rates again in the June meeting of the committee which has begun from today and will conclude on June 8.
“RBI has projected Q1FY23 inflation at 6.3% which is clearly now subject to modification in the upcoming June MPC meet. RBI has already hiked repo rates by 40 bps in a surprise announcement and also indicated that they intend to get the repo rate back to pre-Covid levels," said Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities.
This signals that another hike of about 75 bps is already on cards. Further, other major central banks, including the Fed, have signaled cumulative rate hikes of about 2%-2.5%, as per Chouhan.
Inflation above the 6% upper range prompted the central bank to raise rates in a surprise meet. India's retail inflation accelerated to an eight-year high in April, remaining above the central bank's tolerance limit for a fourth month in a row, and is likely to stay elevated.
"The RBI is expected to hike rates by 25-35bps and Fed by 50 bps, however, the central banks’ thoughts on growth and inflation will be an important determinant of market trend. If the central banks decide on a stringent policy tightening, the market mood can swing bearish," said Vinod Nair, Head of Research at Geojit Financial Services.
With the prolonged war situation, any immediate solution to effectively reduce inflation does not seem to be visible and further rate hikes in stages over the next two to three quarters may also take place to curb the inflationary pressures.
“All this is going to impact the stock market too, in the short run, although a rate hike has already been partly factored in. Over the long period, however, the investment scenario seems to be positive, with continued reforms and investor-friendly policies of the Government," Jyoti Prakash Gadia, Managing Director, Resurgent India.
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