The Reserve Bank of India on Wednesday raised the repo rate by 50 basis points to 4.9 per cent to tame the rising inflation, which has been now above RBI’s 6 per cent tolerance level for four months in a row.
Further, wholesale inflation in the country has been in double digits for over a year now.
RBI Governor Shaktikanta Das on Wednesday, in his remarks while spelling out the outcome of the ongoing monetary policy review meeting that started on Monday, said, India’s retail inflation is likely to stay above the tolerance level of 6 per cent till third quarter of FY23 before moderating below 6 per cent.
For FY23, the RBI sees overall inflation at 6.7 per cent, with 7.5 per cent in Q1, 7.4 per cent in Q2, 6.2 per cent in Q3, and 5.8 per cent in Q4, taking into consideration the normal monsoon and average crude oil basket price of $105 per barrel.
Following are some of the comments and observations of analysts and market experts on the monetary policy review meeting outcome.
Ravi Singh, Vice President and Head of Research at Share india said, in line with the expectation, the RBI has increased the repo rate by 50 basis points and is already discounted by the market. The Ukraine-Russia war has led to an increase in inflation globally beyond tolerance level and is affecting economic growth. However, most of the industries are already facing headwinds due to steep increase in raw materials cost and fuel prices, and a hike in the rates will further increase the burden.
“The US Fed is also increasing the rate so there is a major possibility that apart from the equity market, other markets like the debt market and bond market may see some outflow anytime soon.
“Auto, real estate, banking and infrastructure stocks would be worst hit by the rate hike as loan financing is a major part of these sectors. FMCG, insurance, energy, power and utility sectors provide a cushion against rising interest rates,” he said.
Manoj Dalmia, Founder and Director at Proficient Equities, said, the cost of lending for banks is set to go up due to an increase in repo rate and retail loans will face direct impact due to this.
Suman Banerjee, CIO at Hedonova, said the increase in repo rate is baring its teeth. This is very welcome for the banks as is evident in their rising stock price but not very good for the broader economy.
“A higher repo rate sucks money out of the system and tames inflation. The RBI, however, said they expect inflation to increase by 1 per cent over the next year, which, in my opinion, renders today’s rate hike in vain.”
Mohit Batra, Founder and CEO of MarketsMojo, said the RBI announced a 50 basis points rate hike, which is in line with our estimate. But what has surprised us is that RBI continues to believe the GDP will grow at 7.2 per cent, which we think is an optimistic number. Thus, projected inflation numbers revised upward are in line with our expectations. We expect more rate hikes from the RBI in the coming months. While predicting inflation, the RBI has assumed crude at $105 per barrel from its previous estimate of $100 per barrel. Right now, crude is trading at $120 per barrel. Therefore, there is a high probability that the inflation number may get revised upwards in the coming monetary policy.
Vinod Nair, Head of Research at Geojit Financial Services, said the market and rate-sensitive stocks and sectors should not be dampened by the strong rate hike of 50 basis points as it is in line with the elevating inflation scenario and accordingly equities have been consolidating during the year. On the bright side, there are some points of ease such as no increase in CRR, economic growth being maintained at a healthy 7.2 per cent and no additional measures announced to reduce the liquidity of the banking system.
“However, companies which are heavily leveraged will be impacted on a medium-term basis due to the interest rate rising cycle. The banking sector, being neutral to rising interest rate cycles for a growing economy is our top recommendation, coupled by factors like robust credit growth, lower stress, strong liquidity position and attractive valuation.”
Nikhil Gupta, Chief Economist at MOFSL Group said, since the RBI continues to forecast strong growth, it is very likely that it delivers another 25 basis points hike in the next monetary policy review meeting in August before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints.
Anshuman Magazine, Chairman and CEO – India, South East Asia, Middle East & Africa, CBRE said, the RBI’s decision to raise the repo rate by 50 basis points to 4.9 per cent was a well-anticipated move, considering the steep rise in global inflation levels as well as the monetary tightening measures being adopted by central banks worldwide. We believe that this decisive action will go a long way in curbing mounting inflation levels in the medium term.
Nish Bhatt, Founder and CEO of Millwood Kane International, said the RBI has yet again hiked rates, this was the second hike in two consecutive months – rarely has the central bank been so aggressive on rates. While the quantum of hike in repo rate was on the upper end of the market expectation. The RBI moving its focus to the withdrawal of accommodative policy signals the end of easy monetary policy.
“The RBI’s estimate of inflation above the 6 per cent mark for FY23 will not pinch much provided the growth rate is high to square that off. The hike in the limit for loans for state and rural co-operative banks for residential and commercial real estate is yet another step to boost funding avenues for the real estate sector. It will ensure liquidity and funding for the sector, thereby boosting demand in the rural pockets of the country.”
Yesha Shah, Head of Equity Research at Samco Securities, quite contrary to outcomes of the previous MPC meets, the rate hike and the subsequent steps announced this time have been fairly in line with the consensus estimates. While RBI’s stance has not changed to neutral, the subtle shift from the words ‘remaining accommodative’ to ‘withdrawal of accommodation’ is an important take-away.
“The MPC also increased its CPI estimates to 6.7 per cent from 5.7 per cent for FY23, which now appears to be a more realistic level. This contributes to enhanced credibility and confidence in RBI’s policy decisions. The status quo on CRR certainly comes as a positive surprise for the banking sector and augurs well to nurture the credit growth revival.”
“Overall, as the repo rate still has catching up to do when compared to global peers, this policy seems to be in the right direction to achieve Governor’s aim to bring back the policy rates to at-least pre-Covid levels.”
Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, sais the RBI is clear on 3 things:
- That the real driver of inflation is supply-side based and cannot be controlled by raising interest rates.
- Interest rates have to be raised to keep the “inflation expectations” in check.
- Liquidity has to be brought back to the pre-pandemic level while accommodating and supporting growth.
Shishir Baijal, Chairman and Managing Director of Knight Frank India, said a repo rate hike of 50 basis points was imminent given the current inflationary trajectory and geopolitical concerns. Although the government has taken various measures to control domestic inflation such as food export restriction and cut in excise duty, prolonged war and spike in global crude oil price is still worrisome.
Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers said, while the major part of rate hike by the Reserve Bank of India are already factored in by most parts of the financial market, in the near term, the higher than expected rate hike can have some negative influence in the equity and bond market.