The Reserve Bank of India (RBI) hiked its key repo rate by 25 basis points (bps) to 6.5 percent as expected. This was the sixth consecutive repo rate hike by the RBI in the current financial year FY23 to keep inflation in check.
The RBI remains focused on its stance of withdrawal of accommodation to ensure inflation remains within target going forward while supporting growth.
However, the monetary policy committee (MPC) left the door open for future hikes saying that the sticky core inflation remains a concern to India's economic outlook.
RBI Governor Shaktikanta Das said that they have to remain unwavering in bringing down CPI (Consumer Price Index). Breaking core inflation persistence is the key to strengthening medium-term growth prospects, he added.
RBI revised the FY23 growth forecast to 7 percent (6.8 percent earlier) and the inflation forecast to 6.5 percent (6.7 percent earlier). For FY24, the GDP growth is projected at 6.4 percent while CPI inflation is seen at 5.3 percent with risks evenly balanced on either side.
In his speech, the RBI governor stated that the global economic outlook does not look as grim now as it did a few months ago. "Growth prospects in major economies have improved, while inflation is on a descent though still remains well above target in major economies. The situation remains fluid and uncertain,” Das said.
Most brokerages remain satisfied with the announcement as it was on expected lines. Let's take a look at what market experts have to say about this policy.
Madhavi Arora, Lead Economist, Emkay Global Financial Services
The RBI MPC expectedly increased the policy rate by 25 bps with a balanced tone, albeit non-committal and data dependent, partly as inflation is still around the 6 percent upper tolerance mark, even though it is poised to ease. It has maintained the current stance of "withdrawal of accommodation" to keep policy flexibility ahead, while it acknowledged the recent pace of policy tightening, said Arora.
The fast-evolving world order has meant that data-led policy repricing keeps markets on their toes, and they keep swinging on the timing and extent of policy pivots. However, on a net basis, even as global tightening is still expected, the anticipation of a slowing pace of hikes has eased financial conditions somewhat. This hints that EM Asia central banks, including RBI, could breathe easier, she added.
With this hike of 25 bps, the one-year ahead estimated real repo rate will likely get fairly positive (implying a pause, although not necessarily an end to the cycle). We maintain that the RBI would not turn too restrictive but reckon the situation globally is fluid, and macro assessments might require appropriate adjustments ahead from the policy perspective, said Arora.
Ajit Kabi, Banking analyst at LKP Securities
RBI raised the policy repo rate by 25 bps to 6.5 percent. 4 out of 6 members of MPC voted in favour of hiking rates. The RBI will continue to vigil on the inflation outlook. According to the RBI governor, inflation is likely to stay at 5.6 percent for Q4FY23 and is expected to stay above 4 percent in FY24. The policy rate still trails the pre-COVID level.
The rate hikes are likely to raise the EMI burden for floating rate-linked loans. However, the banks' NIMs are likely to stay stable as an increasing proportion of EBLR-linked loans.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services
The highlight of the monetary policy announcement which came on expected lines is the better-than-expected increase in estimated GDP growth rate for FY24 to 6.4 percent with sharp upward revision in FY Q1 and G2 growth rates to 7.8 percent and 6.2 percent, respectively. This is a reflection of the central bank’s confidence in the economy maintaining the present growth momentum. The governor stressed the fact that the credit growth in the economy was 16.7 percent YoY in January. Optimism regarding FY 24 GDP growth and containing the CPI inflation at 5.3 percent is good news for the equity markets even in the context of unabated selling by FIIs.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS
The RBI’s 25 bps repo rate hike was not surprising. The rate hike is a reflection of the easing inflation, which has been below the regulator’s tolerance band with a moderation of 105 bps in the last two months. There could be another rate hike in the coming months before a pause on the interest rates.
As per the latest print on 27th Jan’23, while credit growth was healthy on a YoY basis, it de-grew marginally on a fortnightly basis, probably hinting at a reluctance to borrow at higher rates. However, easing inflationary pressures should support credit growth. While NIMs have moved with a positive bias so far for most banks, with deposit rates now catching up, banks are likely to witness margin compression going into FY24, despite healthy credit growth.
Umesh Kumar Mehta, CIO, SAMCO MF
The rate hike of 25bps would likely protect the rupee from further depreciation and thus control import-driven inflation, thereby balancing both domestic and external factors for sustainable growth of 6.5% plus the year ahead.
Nitin Bavisi, CFO at Ajmera Realty & Infra India
The RBI repo rate hike of 25 bps was on the expected line given the retail inflation being well within the lines of moderation and the RBI's limit of 6 percent tolerance bandwidth along with the projected slug-like GDP performance.
This move will accommodate the anticipated recessionary churn and aid in maintaining the quarterly GDP performance as expected.
The RBI's upbeat projection on growth means ample demand and robust consumption in the economy. We foresee a minimal impact of today's hike on homebuyers' sentiment and expect home sales to continue without much of an effect. However, the benefits announced for taxpayers in the budget will balance out.
Ritika Chhabra- Quant Macro Strategist - PL PMS
“While the rate hike of 25bps is on expected lines, the markets were expecting the monetary stance to 'neutral'. However, the governor expressed his concern on sticky core inflation and maintained the restrictive stance to 'withdrawal of accommodation'. On further rate hikes, yesterday, the Fed chairman and today, the RBI governor conveyed the same message that the further policy decisions remain dependent on inflation trajectory and incoming macro data.”
Colin Shah, MD, Kama Jewelry on the RBI Monetary policy.
“The RBI hiking repo rate today is on the expected lines. Going by the commentary on inflation and growth we expect a maximum of one more hike as inflation has softened. The central bank's focus on growth despite their policy stance being the withdrawal of accommodative policy will support the recovery and price stability.
RBI's estimate of the current account deficit moderating in H2FY23 and staying within manageable limits will support the currency, and ensure a stable trade deficit. RBI expanding the scope of the Trade Receivables Discounting System (TReDS) is a positive for MSMEs in the export segment. It will encourage financing/discounting of payables of buyers irrespective of their credit ratings.”
Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank
The RBI raised the repo rate by 25bps and kept its stance unchanged at “withdrawal of accommodation” on expected lines. The policy tone was hawkish as the RBI recognised that they are still away from achieving their objective of durable disinflation. Going forward, the central bank is likely to become more data-dependent, and this does not rule out another rate hike in the upcoming policy.
On liquidity, the RBI recognised that there might be some reduction in liquidity surplus as the facilities provided during the pandemic end while providing reassurance that they are likely to balance these out through various instruments available at their disposal. Despite the comments on liquidity conditions remaining accommodative compared to pre-pandemic levels – signaling a somewhat hawkish tone – we expect the RBI to maintain adequate liquidity surplus to remain growth supportive going forward.