Repo Rate Hike | Experts React

The Reserve Bank of India (RBI) on Friday has announced a hike in repo rate by 50 bps. The annoucement was made after a two-day Monetary Policy Committee (MPC) meet that started from September 28.

However, the market experts and economists had earlier predicted about the same. There was a major possiblity of RBI to increase the repo rate. Here is how experts react after MPC decision:

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

50 bps repo rate hike delivered was in line with expectation. Growth forecast was lowered marginally and CPI forecasts unchanged, which is what we had estimated. Key concerns seem to emanating from global factors and to a lesser extent domestic events. The RBI also is mindful of the currency movements given USD strength. We view the policy as neutral and ready to act in response to incoming data, both global and domestic. Bond yields could see some respite buying in the near term, but would continue to closely monitor global yields, especially UST for way forward. Also weighing in on bond markets would be the likelyhood of India bonds’ inclusion in Index, which May not culminate anytime soon.

Deepak Sood, Secretary General, ASSOCHAM

Even as global headwinds persist,India is much better poised than its peers amongst the Emerging Market pack, both in terms of demand pick-up as also supply augmentation. Demand improvement and supply augmentation are the twin positives that would ensure a sustainable growth of seven per cent, as spelt out by the RBI Governor Shaktikanta Das. The RBI is using the best of the monetary tools to anchor adequate liquidity while calibrating inflationary pressures. The two measures are visible across agriculture, services and industry, more so ahead of the festive season.

Santosh Meena, Head of Research, Swastika Investmart

The 50 Bps rate hike by the RBI in today’s meeting was in-line with the expectations. The key highlights were the resilience shown by the Indian economy considering the turbulent global environment and concerns emanating from global growth slowdown and hawkish stances of various central banks. Inflation is witnessing a downward trajectory, nonetheless, the reduction in GDP growth forecasts was one of the letdowns in the overall commentary.

Amar Ambani, Head – Institutional Equities, Yes Securities

RBI’s MPC expectedly voted for a 50bps hike, replicating the endeavour of global central banks to protect their currencies from prevalent volatility. The central bank also retained its stance on withdrawal of accommodation, stating that liquidity conditions will remain accommodative given the higher government spending during H2 FY23. 

On inflation projections, the CPI forecast for FY23 is retained at 6.7 per cent. Though falling Oil price is a positive, high Food prices pose an upside risk to the inflation forecasts. 

On the growth front, RBI downgraded the FY23 GDP projection to 7 per cent from the earlier estimate of 7.2 per cent. Nevertheless, the central bank remains confident of demand remaining supported during H2, thanks to stable private consumption, while rural demand is also picking up.  On the future interest rate moves, though RBI’s stance is more driven by domestic factors, the current landscape of aggressive rate hikes by the Fed and ensuing rupee weakness will compel RBI to closely follow the interest rate moves in the US. RBI will likely raise the repo rate by 35bps in September.

Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance Company

MPC continues to do a fine balancing act, despite the adverse global backdrop of chaos in rates and FX markets due to hyper-aggressive stance of central banks to rein in the elevated Inflation. RBI has stuck to its overarching focus of nurturing the nascent recovery of growth and has avoided any sort of collateral damage so far and continues to bubble wrap the economy. Clearly, with today’s frontloading of rate hikes, the future course of rate hikes appears to be very shallow, given the imminent softer patches of global growth and receding Inflation trajectory. Overall ‘well thought out and a balanced policy.

Anil Gupta, Senior Vice President, Co Group Head, Financial Sector Ratings

As a stepping stone towards IND-AS, expected credit loss (ECL) based provisioning approach is expected to be implemented for banks. While we await the draft guidelines from RBI, in our view, with improved capital position along with high provision cover on NPAs, the banks are likely to be well-positioned to take incremental hit, if any, on their capital because of increase in provisions on their standard as well as overdue loans.

Securitisation of Stressed Assets Framework

There has been active interest from various other investors in stressed asset markets. These investors do invest in such stressed assets by participating in security receipts issued by ARCs. Allowing participation to a more set of investors could widen the investor base for direct purchases of these stressed loans from banks and could lead to better price discovery for banks.

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company 

With a 50bps policy rate hike, the MPC has delivered just what was expected by financial markets. Inflation projection for FY23 was kept unchanged at 6.7 per cent, while GDP growth projection was revised marginally lower to 7 per cent. However, in spite of the policy rate hike, the stance of policy remains as “withdrawal of accommodation”. This leads us to believe that in light of domestic inflation situation, the MPC will continue with further policy rate tightening. 

However, India’s inflation problem is far more benign and manageable in comparison to what most of the world is facing. Hence, markets may take comfort in the fact that the future policy tightening by RBI will be relatively unhurried. While RBI remains vigilant on the currency front, it expressed comfort on the external front owing to India’ stable macros and comfortable forex reserves.

With the no-surprise policy out of the way, domestic rates market will now focus on global factors and prospects of India’s inclusion into Global Bond Index. We expect 10Y Government Bond to trade in 7.25-7.50 per cent band in the near term.

Nilesh Shah, Group President & MD, Kotak Mahindra Asset Management Company

The RBI gave a “Mai Hoon Na” policy doing a fine tight rope walking between Inflation, Growth and Stability. The RBI is batting on a difficult pitch against a hostile bowling. Rapidly deteriorating global situation, drawdown of systematic liquidity and FX reserves, inflationary pressure and Growth concern are testing the RBI. The RBI has so far batted with few misses. Most important thing is that they haven’t lost the wicket and kept score board moving. The RBI has been proactive and data driven to deal with rapidly evolving situation. They have assured the market that they are in safe hands in the global storm.

Neeraj Dhawan, Country Manager, Experian India

Continuing with its response to curb inflation and control liquidity while responding to various external economic factors, the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) has announced a hike in the policy repo rate by 50 basis points taking it to 5.90 percent. This is the fourth consecutive hike since May this year.

Although the RBI has managed to bring down the Consumer Price Inflation (CPI) index from its highly elevated levels, it is still above the targeted threshold. With improved credit conditions boosting demand, the supply-side issues and evolving geo-political tensions around the globe can be primarily attributed to this hike. Rupee depreciated in an orderly manner against dollar. Rupee has performed much better than reserve currencies, EM currencies.

The recent interest rate hike by the US Federal Reserve and developments in the forex market prompted a rate hike of 50 basis points. Further, with banking liquidity temporarily venturing into the deficit zone, the RBI is looking to support the market through interest rate hikes.

Shanti Ekambaram, Wholetime Director – Designate and Group President, Kotak Mahindra Bank

In line with market expectations, the MPC increased repo rate by 50 bps, estimated GDP growth for this fiscal at 7 per cent and inflation unchanged at 6.7 per cent. Their stance remained “withdrawal of accommodation” while supporting growth. Indian macroeconomic metrics and growth continued to be resilient amidst volatility in the global economic and financial markets due to aggressive tightening by global central banks. 

Private consumption and investment demand in India continued to be strong, service exports are at an all-time high and capacity utilisation in the manufacturing sector has been increasing. Overall, RBI will continue a calibrated strategy of ensuring price and financial stability while supporting growth. While the central bank will go by emerging data on inflation and growth, we expect further rate hikes.

Madan Sabnavis, Chief Economist, Bank of Baroda 

The RBI policy was more or less on expected lines which is also the reaction of the markets – stocks, bonds and currency. Given the commentary in the speech, it does appear that we could expect a further 50-60 bps increase in rates in the coming months that can take the terminal rate to 6.4-6.5 per cent. The fact that inflation will be high will be the chief driving factor as there are some upside risks to the number of 6.7 per cent due to developments on the agricultural side.

The RBI does appear to be more confident on growth, where the target has been lowered marginally which appears to be more due to statistical reasons. All the high frequency indicators show that growth will be stable this year with limited downside risk.

The stance remains withdrawal of accommodation indicating that there is scope for further reduction in surplus liquidity in the system. The RBI has merged the 14 and 28 days variable rate reverse repo auctions, which is more to ensure that liquidity does not get locked in for a longer period of time creating spikes in the money market rates.

Puneet Pal, Head – Fixed Income, PGIM India Mutual Fund

The MPC Policy announced today is a very well balanced and nuanced policy. It was in line with market expectation with no surprises. The Policy Repo rate was hiked by 50 bps which was in line with market expectation though some sections of the market were expecting a hawkish commentary from RBI, which did not materialise. The decision to raise rates by 50 bps was with 5-1 majority.

RBI lowered its GDP growth forecast for FY23 to 7.00 per cent from 7.20 per cent earlier while retaining the inflation forecast at 6.70 per cent. We expect rate hikes to continue going ahead though expect some steepening of the curve given that currently it is pretty flat. We recommend that investors should increase their investments in actively managed short duration products, while selectively looking at dynamic bond funds as per their risk appetite.

Jaspreet Singh Arora, Chief Investment Officer (CIO), Research & Ranking

RBI’s decision to raise its repo rate unanimously by 50bps was in line with expectations and a function of US hiking rates. India has hiked repo rate by a cumulative 190bps since the pandemic lows but lower than US 300bps cumulative hike. Also, pertinent to note that India’s interest rate is still below its pre-pandemic levels at this juncture compared to the US, with India inflation also being lower than US. Despite the recent rate hikes, bank credit growth continues to pick up, clocking 16.2 per cent YoY growth in September ‘22 which is a decadal high!

With normal monsoons and strong festive season demand expectations, India is in a sweet spot among major economies. Even as India’s GDP expectations have been downgraded from 7.2 per cent to 7 per cent for FY23, it is far higher than GDP expectations of major economies like US (2.3 per cent for 2022) and UK (3.2 per cent for 2022). The requirement of banks moving to ECL methodology is a step in the right direction and should not impact the banking system as most banks have healthy PCR levels.

Indranil Pan, Chief Economist, Yes Bank

Backed by resilient domestic growth dynamics, the RBI clearly has tended to follow the aggressive global monetary policy hiking cycle with a 3rd dose of 50 bps increase. The negative spillovers from the monetary policy cycle of the AEs in a highly integrated global financial system probably remains a bother for the RBI. The consequence of the sharp rate hikes in the US is manifesting in a weaker interest rate differential between India and the US, and this is likely to have a negative implication of global flows into India. Further, the depreciation in the INR is also putting a spoke in the RBI’s fight against inflation in India.

Unlike the AEs, the RBI stopped short of providing any forward guidance to its own monetary policy as it feels that this could be risky for an emerging market country like India. Our view is that the RBI is standing ready to deepen and elongate its rate hiking cycle consequent to the global dynamics of policy rates. We believe that the RBI would be open to push the repo rate to 6.50 per cent levels by February 2023, implying two more hikes – in December by 35bps and in February by 25bps.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

The 50 bps hike in repo rate was in line with our expectations though we had expected a slightly more hawkish tone to the policy communication. We see the tone as more neutral and the RBI seems to be confident of balancing out the external as well as domestic risks. Stance of liquidity withdrawal was also unchanged. We believe that durable liquidity will move towards neutral by end-FY2023. Overall, we believe the RBI will be more data dependant from hereon. We continue to expect another 35 bps hike in December followed by a pause with the RBI assessing Fed actions, and impact of past rate hikes on domestic growth and inflation.

Sujata Guhathakurta, President & Business Head, Debt Capital Market & Infrastructure Financing, Kotak Mahindra Bank

The hike in policy rates of 50 basis points (bps) was largely on expected lines. RBI maintaining stance of withdrawal of accommodation was the need of the hour following the rise in domestic inflation (CPI) that has hovered above the threshold level of tolerance as well as the aggressive monetary tightening across the globe. However the VRRR 28 days merger into 14 day and RBI reiterating it’s intention to monitor liquidity situation is a welcome move.

Avinash Godkhindi, MD & CEO, Zaggle

RBI’s decision to hike the repo rate by 50 bps is on expected lines and will help in taming the retail inflation which has remained high over the last few months. It may also help in addressing another concern of a depreciating rupee. In the past few months, the country has experienced an increase in investment activity suggestive of an economic revival and the current festive season is expected to give a further fillip to the economic activities. Amid several other short term global macro concerns such as geo-political tensions, global financial market volatility, crude oil prices, supply side disruption, and tightening global financial conditions, India remains the beacon of hope and an ocean of opportunity and RBI's move is in the expected and right direction.

Sumit Chanda, CEO & Founder, JARVIS Invest

The increase in repo rate by 50bps today among other measures to curb inflation was in line with the actions taken by the central banks across the world. The markets had factored this in and the response to this was immediately visible. While the inflation concern still exists, the outlook hasn't changed which is a positive. From the stock market's perspective, we will continue to track the US inflation numbers and the FED outlook which will, to a large extent, dictate the course of the markets over the next few months. The Q2 FY 22 results will start coming in soon and since this is the beginning of the festival season, it will be interesting to watch the demand trends. The Jarvis AI tool suggests the current nifty levels are good to invest.

Amar Ambani, Head – Institutional Equities, Yes Securities

RBI’s MPC expectedly voted for a 50bps hike, replicating the endeavour of global central banks to protect their currencies from prevalent volatility. The central bank also retained its stance on withdrawal of accommodation, stating that liquidity conditions will remain accommodative given the higher government spending during H2 FY23. On inflation projections, the CPI forecast for FY23 is retained at 6.7 per cent. Though falling Oil price is a positive, high Food prices pose an upside risk to the inflation forecasts. On the growth front, RBI downgraded the FY23 GDP projection to 7 per cent from the earlier estimate of 7.2 per cent. 

Nevertheless, the central bank remains confident of demand remaining supported during H2, thanks to stable private consumption, while rural demand is also picking up. On the future interest rate moves, though RBI’s stance is more driven by domestic factors, the current landscape of aggressive rate hikes by the Fed and ensuing rupee weakness will compel RBI to closely follow the interest rate moves in the US. RBI will likely raise the repo rate by 35bps in September.

Gaurav Chopra, Founder & CEO, IndiaLends

The rate hike announced by RBI is in line with expectations. It's too early to comment on how and when lending institutions would pass on the hike to customers. However, we believe such measures will bring the focus back to consumers' credit profiles and the importance of maintaining healthy credit scores. It is all the more important that consumers continue to service their debt responsibly. If unable, they must speak with their respective lending institutions to identify measures to keep the EMIs affordable. We believe financially prudent individuals would leverage the opportunity to demonstrate good borrower behaviour and try to offset some of these increased costs by qualifying for lower interest credit through a strong credit profile.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank 

Repo policy rate hike of 50bps is in line with our expectations. Given the global adverse conditions we remain wary on the pressure on INR and hence the need for continued rate hikes. We expect the MPC to hike 35bps in the December policy. However, with inflation expected to fall within 6 per cent threshold in 4QFY23, we expect the MPC to probably pause and assess the lagged impact of monetary tightening.

Anu Aggarwal, President & Head of Corporate Banking, Kotak Mahindra Bank

The 50 basis points (bps) hike in policy rates has been in line with market expectation. The current stand by the Reserve Bank of India (RBI) is partly driven by the US Federal Reserve which is going aggresive in order to bring down inflation. RBI had to do this instead of a 30-35 bps to control Rupee depreciation and therefore imported inflation. Meanwhile the rise in rates will slowdown Capex plans of Corporate India which were just about kicking off.

Pritam Chivukula, Co-Founder & Director, Tridhaatu Realty and Treasurer, CREDAI MCHI

RBI 's decision to hike the interest rates to tackle the inflation and ensure domestic economic recovery was a no-brainer. The sharp acceleration of rates consecutively for the third time in a short period may have a short-term effect on the sentiment of homebuyers as low interest rates have been the biggest factor in the resurgence for real estate demand in the last two years. We hope that the State Government will step-in to lighten the homebuyer’s load by reducing stamp duty to boost the sentiments in the festive season.