The Reserve Bank of India (RBI) on August 5 raised the repo rate by 50 bps to 5.40%, bringing the repo rate back to pre-pandemic levels, the highest since August 2019 while it retained its stance at 'withdrawal of accommodation.'
Bank rates and Marginal Standing Facility (MSF) rates were adjusted to 5.65%, and 5.15%, respectively. RBI left the CRR untouched. Cash Reserve Ratio (CRR) is the deposit that banks are mandated to maintain by the RBI as reserves in the form of liquid cash.
RBI also retained the real GDP growth projection for FY23 at 7.2% while the central bank projected FY23 CPI inflation at 6.7%.
Analysts mostly found the rate hike on expected lines while they highlighted that more rate hikes are coming since the inflation remains above the tolerance band of the RBI.
Let's take a look at what experts have to say about the RBI MPC outcome:
Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank
We expect the RBI to continue with its rate hikes in the upcoming policies taking rates up to 5.75% by the end of the year. The bond market rally seen over the last few days is likely to reverse and we expect the 10-year paper to trade closer to 7.3-7.4% by the end of the quarter as markets reprice in RBI action and the supply of both SDL and central government bonds this year.
Motilal Oswal, MD & CEO, Motilal Oswal Financial Services
Despite this sharp hike, RBI expects the inflation to remain above its comfort zone and has retained its CPI inflation forecast at 6.7% for FY23. RBI expects India’s GDP growth to remain strong at 7.2% in FY23.
We believe, the commodity prices have cooled off including crude oil, and the inflation may be peaking out. We expect RBI may not be very aggressive in its subsequent policy meets and be more data-driven based on inflation numbers.
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%. It was imperative for RBI to hike rates as it has a clear focus on getting inflation down to its ceiling of 6%.
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 about the equity market and not react to every move in the market.
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company
RBI MPC voted unanimously to hike the repo rate by 50 bps to 5.4% - taking it to pre-pandemic levels. RBI MPC is in line with our expectations. Inflation seems to be at the forefront of the move as they maintained CPI forecasts intact at 6.7% for FY23.
To us, this means we are not done with the rate hiking cycle yet and we could brace for a 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 G-Sec supply and take cues from global bond yields going forward. Staggered investment approach in fixed income stays.
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 a 5.75% repo rate by Dec 2022.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services
The 50bp repo rate hike came 15bp higher than the majority expectation of a 35bp hike. It is evident that the MPC is frontloading the rate hikes since it feels that "CPI inflation is above comfort levels".
The MPC has been emboldened to go for this 50bp hike since "the economic activity is resilient" and "withdrawal of accommodation stance is necessary to anchor inflation expectations".
The RBI governor went so far as to say that "the Indian economy is holding steady in an ocean of turbulence". The capacity utilization in the industry at 75% is higher than the long-term average.
This positive view of the economy has been well received by the stock market in spite of the higher-than-expected repo rate hike.
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research
What is noteworthy is that the central bank has not revised its existing growth or inflation forecasts despite indications of a global slowdown, recessionary conditions in the developed economies, and the moderation already witnessed in commodity prices.
Possibly, it would like to go through more data points over the next two months before reviewing these forecasts. At this point, the central bank believes that India’s growth in the current year would be largely resilient with the mitigation of risks of a monsoon failure and a healthy pickup in rural demand.
While we await the inflation print for Q2FY23, we believe that rate hikes going ahead will be moderate and there can even be a pause if the CPI data throws up figures nearer to 6.0% over the next 2-3 months. For now, however, one can expect further deposit and lending rate hikes by banks, given the improved credit demand in the economy.
Santosh Meena, Head of Research, Swastika Investmart
Today’s RBI MPC decision to hike the repo rate by 50 BPS is in line with the market expectations, thus remaining a non-event. This move and the change in stance from neutral to the withdrawal of accommodation were imperative to ease down the current scorching inflation.
Inflation is expected to remain above the central bank's 6% threshold in the second & third quarters of this fiscal year, whereas for the whole year CPI inflation is projected at 6.7%.
The recent commentary by the governor has corroborated the statement that India has zero probability of slipping into recession. Nevertheless, the commentary was cautious about the global & geo-political issues that could severely impact the supply chains.
Sunil Damania, Chief Investment Officer, MarketsMojo
We had expected the RBI to hike the interest rate by 25-35 basis points. However, it has hiked by 50 basis points. One of the reasons why the RBI has decided to act a tad aggressive in hiking the rate of interest is to protect the Indian currency.
This is back on yesterday's occurrence, where the Bank of England hiked interest rate by 50 basis points. As we advance, at the maximum, the RBI may have one more rate hike and perhaps pause on announcing further rate hikes.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.