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RBI MPC: Experts React Post Repo Rate Hike

The central bank's monetary policy commitee (MPC) meeting had started on August 3 and ended on August 5

Photo Credit : Reuters

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The Reserve Bank of India (RBI) Governor, Shaktikanta Das on Thursday declares 50 bps increase in the repo rate. As the interpretations were made earlier about it, this repo rate will again bring a hike on lending rates. The central bank's monetary policy commitee (MPC) meeting had started on August 3 and ended today, i.e, August 5.

Here is what reaction experts have given post MPC meet:

Upasna Bhardwaj, Chief Economist,  Kotak Mahindra Bank

The MPC decisions have been in line with our expectations. Given the increasing external sector imbalances and global uncertainties the need for frontloaded action was imperative. We continue to see 5.75 per cent repo rate by Dec 2022.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company

RBI MPC voted unanimously hike repo rate by 50 bps to 5.4 per cent - taking to pre pandemic levels. RBI MPC is line with our expectations. Inflation seems to be at the forefront of the move as they maintained CPI forecasts intact at 6.7 per cent for FY23. To us, this means we are not done with rate hiking cycle yet and we could brace for continued northward journey in rates. Withdrawal of accommodative stance has been maintained. We see this as a “no dovish” undertone policy contrary to markets expecting a dovish stance. Bond markets would now focus on incremental gsec supply and take cues from global bond yields going forward. Staggered investment approach in fixed income stays.

Churchil Bhatt, Executive Vice President, Debt Investments, Kotak Mahindra Life Insurance Company

MPC today unanimously decided to hike Policy Repo Rate by 50 bps and persist with the policy stance of “withdrawal of accommodation”. The MPC took comfort from the broad basing of domestic growth impulses, while keeping its FY23 GDP growth projection unchanged at 7.2 per cent. Despite the recent moderation in global commodity prices, MPC has retained its FY23 inflation projection at 6.7 per cent. Expressing confidence in India’s macro stability, the governor alleviated fears around Rupee volatility. Going forward, the MPC assured markets of its ability to deliver a soft landing for the economy, while keeping inflationary pressures at bay. Given the global recessionary backdrop and its accompanying disinflationary impact, we believe policy rates in India will peak tad below 6 per cent in this calendar year. In light of the same, further rate actions will be more calibrated and data dependent. Yield on benchmark 10-year Government Bond is expected to remain in 7.10 - 7.40 band in the near term.

Srikanth Subramanian, CEO-Designate, Kotak Cherry

The RBI rate hike of 50 basis points is in line with our expectations. With today’s rate hike we are back to pre-pandemic levels of 5.40 per cent. It was imperative for RBI to hike rates as it has a clear focus on getting inflation down to its ceiling of 6 per cent. Inflation has been above RBI’s comfort zone for six straight months. Equity markets had already discounted the hike and therefore didn’t hamper the overall sentiment of the market. However with several headwinds and not so cheap valuations of the Indian market, investors should remain cautious on the equity market and not react to every move in market.

Garima Kapoor, Economist, Elara Capital

To rein in inflationary pressures and to anchor inflation expectations the MPC hiked repo rate by 50 bps and retained its stance on withdrawal of accommodation. 

After today’s policy we expect hike of another 25 bps in policy rate and expect MPC to become data dependent while it assesses the impact of the recent hikes on inflation. As risks of global slowdown get priced in, Indian 10-year yield is likely to oscillate in the range of 7.15 to 7.35 amid sympathetic movement in tandem with movement in global yields.

Vijay Kalantri, Chairman, MVIRDC World Trade Center

Despite the recent softening of metal and crude oil prices in the global market, RBI has not revised down its CPI forecast for current year, which reflects that inflation continues to be a major concern. The Central Bank has also not revised down GDP growth forecast for the current year, despite global recessionary fears, which reflects RBI is confident of strong economic growth; but it is worried about persistently high inflation.

All these indicate that RBI will raise policy rates by at least 50 basis points in its October policy meeting as well.

Madan Sabnavis, Chief Economist, Bank of Baroda 

The RBI has clearly taken an aggressive position on inflation even though there is no change in the forecasts on both inflation and growth. The confidence in growth gives it a strong justification for attacking inflation in a big way. We may expect another 50 bps hike during the year in this situation as inflation in the next two quarters will remain above 6 per cent. The RBI’s commentary on growth is also reassuring as growth seems to be on the stable path notwithstanding the disturbances in the global arena.

We can expect liquidity to be managed evenly by the RBI through VRR and VRRR auctions to ensure there are no distortions in the market. Surplus in liquidity would be driven by how deposits and credit behave. As long as deposit growth is low, which is the case today and credit growth higher, there would be pressure on liquidity. Depending on the momentum in the economy there would be some volatility in liquidity which will then require intervention through VRR or even OMOs going ahead.

Rajni Thakur, Chief Economist, RBL Bank

MPC announcements this morning were largely on expected lines. The markets had broadly priced in 50 bps hikes in Repo rates and any forward guidance would have mattered more than the rate action itself. The policy statement however, stayed away from any explicit forward guidance while remaining consistent on its assessment of growth and inflation trajectory for the economy. Any mention of nature and quantum of intervention, to manage currency faced with huge capital outflows didn’t find a place as well. Nevertheless, given the growth-inflation outlook, further hikes towards 6% terminal repo rate seem imminent, even though the pace of hike will likely be softer going ahead. Continued ‘focus on withdrawal’ indicates further drawdown of excess liquidity as well, in which case, monetary tightening is far from over yet.

Neeraj Dhawan, Country Manager, Experian 

Sustaining its 'withdrawal of accommodation' stance, the Reserve Bank of India (RBI) hiked the policy repo rate by 50 basis points, taking it to the pre-pandemic levels of 5.40 per cent, to fight the increasing inflationary pressures. Though the consumer price inflation is down from its peak in April 2022, it is still above the upper threshold target. The RBI expects inflation for Q2 at 7.1 per cent and Q3 at 6.4 per cent. Consumers can expect loan and deposit rates to increase amidst improving inflation conditions. 

It was also announced that as a part of its Development and Regulatory Policies, to improve the credit ecosystem in the country, Credit Information Companies (CICs) will be brought under the purview of the RBI’s Integrated Ombudsman Scheme. This will offer a faster redressal mechanism for grievances. Also, CICs will be required to have their own internal Ombudsman (IO) framework. This is a positive step that will help consumers resolve their concerns to gain timely access to credit and be in control of their finances.

Indranil Pan, Chief Economist, YES Bank

RBI delivered a 50 bps hike in the repo rate as it continues its effort towards frontloading of interest rate increases, while ensuring that the second-round effects of the supply side shocks are contained and long-term inflation expectations are anchored. With data indicating slowing global growth, central bankers have started to highlight that data will significantly determine the pace of monetary policy tightening going forward. Thus, we point to a more data driven RBI from here on (like most other Central Banks across the world). As the trajectory of CPI inflation is pointing downwards, we expect the RBI to moderate the pace of hikes and raise the repo rate by 25-35 bps in September and 25 bps in December to 5.90-6.00 per cent and pause thereafter to assess the growth-inflation dynamics.

Dinesh Khara, Chairman, SBI

The RBI Policy Statement reaffirmed the commitment to bring inflation down further and ensure financial stability in markets. In principle, RBI from its vantage position has harmonised key measures, ensuring the economy remains cushioned to the maximum extent from the impact of inflation in everyday lives. The developmental measures are largely aimed at ensuring broad-based participation in G-Sec and the foreign exchange market. The impact of the Bharat Bill Payment system is likely to play out over the medium term.

George Alexander Muthoot, MD, Muthoot Finance

 In line with our expectations, the RBI announced a hike in the repo rate by 50bps to 5.4 per cent and retained its policy stance at 'withdrawal of accommodation'. This is the third consecutive hike in repo rate, in order to tame inflationary expectations. The challenges on the global macro front continue to persist with high crude oil prices, protracted geopolitical tensions, upsurge in global financial market volatility and tightening global financial conditions. Amidst this, the RBI retained its FY23 GDP forecast at 7.2 per cent, given that there has been ample amount of broadening in India’s economic activity and several factors pointing towards strengthening of urban demand. However, the rural demand is yet to revive fully and we will be watchful of the same. One significant development proposed by the RBI is to enable Bharat Bill Payment System (BBPS) to accept cross-border inward bill payments. We believe this will help entities with cross border remittance licenses like us enable easy payments from NRIs who otherwise have been facing challenges in utility bill payments on behalf of their families in India. The RBI remains committed towards maintaining price and financial stability and we believe that despite macro headwinds, the Indian economy has been fairly resilient. This keeps us optimistic that both urban and rural demand for gold loans will hold steady for FY23.

Sumit Chanda, Founder & CEO, JARVIS Invest

Jarvis Invest AI propriety tool (‘JARVIS’) comes up with the exit and rebalance calls for a multitude of reasons. These could vary at a stock level or even at the sector level.What we have observed in recent times is an increase in allocation towards sectors like Pharma, Financial Services, IT and Industrial Manufacturing. At the same time, the sector allocation towards Consumer goods and Automobile has reduced.

Globally, we were all fighting more or less the same battle for the past few months. Inflation, slowdown in global demand, the war in Ukraine, high crude prices, etc. Locally, we were under tremendous pressure due to global geo-political tensions, global financial market volatility, Rupee at almost 80 to the dollar, Brent going beyond USD 120, FIIs taking money out, among other things. While this painted a grim picture for India, we always reiterated the resilience of Indian economy and the confidence in "India" story which was proved right by JARVIS through its recommendations. JARVIS, the AI proprietary tool did recommend staying in cash for a while and it again started deploying funds in the past 2 weeks as it observed reduced volatility and some positive news on the horizon.

While the RBI has hiked repo rate by 50bps today to 5.4 per cent - levels seen since the beginning of the pandemic, the RBI also retained FY23 GDP growth projection to 7.2 per cent on the back of resilience of domestic economy, strengthening in urban demand, pick up in investment activity & capacity utilisation. While the Indian Rupee has depreciated against the USD, it has relatively performed well against other currencies. Recently, FIIs have pumped in close to Rs 5,000 crore in the stock market, the GST collection numbers and the PMI levels for July indicate that we are on the road to recovery. However, this doesn't mean that we are completely out of the woods.

The caution here is evident from JARVIS recommendations as the system has recommended higher allocation to Large Caps and reduction in allocation to Mid Caps. At the same time, JARVIS system has allocated more towards small caps.The kind of roller coaster ride that we have witnessed in the markets in the past one year, bias or heuristics of any sort would have spelt disaster for investor's money. JARVIS has been playing a splendid role in protecting investor money and has become a beacon for our belief in "Emotionless" Investing."       

Avinash Godkhindi, MD & CEO, Zaggle

RBI’s decision to increase the repo rate for the third consecutive time by 50 basis points was on the expected lines to tame retail inflationary expectations. While there has been some recent respite in global commodity prices, overall global factors like elevated crude oil prices, supply side disruption, geo-political tensions, global financial market volatility and tightening global financial conditions do weigh on the macro front. On the other hand, there is pick up in investment activity, capacity utilisation is above long term average and high frequency indicators suggest pick-up in economic recovery. This keeps us fairly optimistic on India growth recovery and we believe Indian economy continues to demonstrate resilience amidst global headwinds. The recent record of UPI transactions of 6 billion in July suggests the rapid adoption of digital payments in the country. We believe the RBI’s recent decision to link Rupay credit cards to UPI will further provide a big boost to digital payments ecosystem. RBI’s conceptualised ecosystem Bharat Bill Payment System (BBPS) driven by NPCI is a one stop ecosystem for all bill payments across India. The RBI today proposed to enable BBPS to accept cross-border inward bill payments, this further highlights the robustness and maturity of India’s payment infrastructure.

Sidharth Rath, MD & CEO, SBM Bank India

The 50bps hike in Repo rate is in line with the expectations from a wider section of the market. The inflation projection of 5 per cent for first quarter of financial year 2023-24 coupled with the reiteration of the downward trajectory as we move to further into the financial year 2022 23 is a clear indication of the determination to act on curtailing the inflation. Certain concerns mentioned by the Governor, such as the impact on imported inflation due to appreciation of US dollar and increased transmission of cost pressures to output prices in near future, also hint toward a continued emphasis on the need for more tightening in the rest of the year.

The proposition for permitting standalone primary dealers on market making for Foreign Exchange and permitting them to transact directly with non-residents in offshore foreign currency settled overnight index swap market is a welcome move that will increase the universe of market makers in both these segments leading to better price discovery, improved cross-selling and end to end services (Activities in Debt + solution for hedging currency risk). 

Proposed Committee for examining the prevailing issues on MIBOR benchmark is a step ahead for making MIBOR/alternate benchmark more reflective of the larger universe of activities on the NDS Call platform. Enabling Bharat Bill Payment System to accept cross-border inward payments is a good move aimed at improved inclusion facilitating NRIs on undertaking utility payments for their families in India.

Anitha Rangan, Economist, Equirus

While RBI has delivered a 50 bp hike “quoting this quantum as a new normal”, we would think that the hike was a balanced one, with RBI’s tone suggesting that future rate hikes may not be as aggressive. The repo rate is now well above the pre-pandemic level of 5.15 per cent and the withdrawal of accommodation stance suggests that liquidity could remain tight with credit offtake. RBI has maintained both growth and inflation targets. While retaining its growth estimates with global agencies downgrading growth was a surprise, RBI’s contention is that domestic trends are holding up well. The policy statement does highlight that external risks are imparting very high level of uncertainty to the outlook with the key risks to domestic forecasts emanating from external headwinds. This also leads to the conclusion that external headwinds may have played a meaningful role in the rate hike decision. However, future rate hikes may not be as aggressive. Why so?

Three factors from the policy statement suggest that further pace of actions not be as aggressive a) Inflation estimates for Q1FY23 are 5 per cent which leaves scope for real returns to turn positive by next year (if one were to consider 1Y T-bill it will be sooner b) inflation is led by supply side factors c) growth support if private capex comes back. If currency pressure subdues with flows returning and RBI’s expectation of CAD within manageable limits, RBI can soften its hike pace, suggesting that RBI may undertake one more hike of 25 or 35 bp with a pause by Dec 2022 taking the repo rate to 5.65 - 5.75 per cent.

Therefore where do we think the rates headed? While the benchmark 10 year has retraced significantly from its peak of 7.6 per cent in mid-June we can expect 10Y to retrace its level back as supply and fiscal pressures will resurface in 2nd half of FY23. While the tight liquidity scenario does open the door for OMOs, with a “withdrawal of accommodation stance” RBI may be able to conduct OMOs on a selective basis. Witnessing that the curve has flattened meaningfully with short term rates rising more than 100 bps since April 2022, the defacto hike is certainly more than the repo rate hike.

Shanti Ekambaram, Group President and Whole Time Director Designate, Kotak Mahindra Bank

In line with expectation RBI hiked repo rate by 50 Bps. The narrative was clear on withdrawal of accommodation while supporting growth, due to inflation being elevated, economic growth being resilient, including strong growth in banking credit. India continues to be impacted by global headwinds of geo political tensions, tightening financial markets and volatile commodity markets and thus inflation beingabove the upper targeted mark of 6 per cent. Therefore while RBI has kept economic growth unchanged at 7.2 per cent for the fiscal year, inflation for the year is estimated at 6.7 per cent and central bank is likely to continue to ensure currency stability, manage liquidity and increase rates to manage inflation.