The Reserve Bank of India (RBI) raised the repo rate by 50 bps to 4.90 percent with immediate effect, as expected by market experts and changed the stance to 'withdrawal' from 'accommodative' in an effort to keep the rising inflation under control.
The RBI's Monetary Policy Committee voted unanimously to continue with its 'accommodative' stance in its first policy statement since a surprise 40-basis-point hike on May 4.
However, RBI retained GDP growth projections at 7.2 percent. RBI believes Q1 will see GDP grow at 16.2 percent while Q2 GDP growth is expected to be at 6.2 percent, Q3 is seen at 4.1 percent and Q4 GDP numbers are expected to be at 4 percent.
Das said the inflation has steeply increased much beyond the tolerance level while the process of recovery in emerging market economies is also getting affected. He, however, retained faith in the economic growth of the country which he termed as 'resilient'.
"We are facing new challenges with every passing day due to the war. War in Europe is lingering, challenges accentuating supply chains. Recovery is gaining momentum despite the pandemic and war. On the other hand, inflation has become global," RBI Governor Shaktikanta Das said. He added that inflation is projected at 6.7 percent in FY23 with the assumption of a normal monsoon and an average crude price of $105 per barrel.
Let's take a look at what experts have to say about the latest monetary policy decision:
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services
"RBI's projections of GDP growth rate of 7.2 percent and inflation of 6.7 percent for FY23 reflect a realistic monetary policy. The higher inflation projection indicates that the central bank recognises the seriousness of inflation and the 50 bp repo rate hike is a message that they are determined to anchor inflation expectations. The Governor's remark that " the economy remains resilient and recovery has gathered momentum" is bullish from the market perspective. The bond market's positive response with bond yields rising stems from the absence of a CRR hike"
Anuj Puri, Chairman – ANAROCK
As anticipated, with inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI has decided to increase the repo rates by 50 bps. A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales. The RBI is tasked with controlling the spiraling inflation in the country but must simultaneously be careful to not hurt demand recovery. This is a tightrope walk under the best of circumstances. Overall, high inflation with low GDP can be a cause of worry but as of now, the Indian economy remains robust.
The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. The current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments. The silver lining is that the Indian housing market is still largely end-user-driven, so there is no investor mindset seeking the lowest possible entry point. Genuine demand comes from an underlying aspiration for homeownership.
Shivam Bajaj, Founder & CEO at Avener Capital
With CPI forecasts at 6.7 percent from 5.7 percent, the RBI rate hike of 50bps came in line with market expectations and was taken into account by the market in the previous trading sessions. In an attempt to curb inflation, the expectations of this rate hike had been factored in the form of an increase in bond yields, which might result in expensive borrowing for corporates. However, a consequent correction expected in raw material prices as a result of this announcement might provide a stable long-term growth plan for the overall economy.
Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities
The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI’s decision of hiking the repo rate by 50 bps as well as increasing the inflation estimate by 100 bps was in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking the repo rate to ensure a neutral to the marginally positive real policy rate.
We expect a 35 bps repo rate hike in the August policy to 5.25 percent and a repo rate at 5.75 percent by end-FY23. Along with pushing the repo rate to above the pre-pandemic level, a 35 bps hike would also signal a gradual normalization in the policy actions while being adequately hawkish. We also expect another 50 bps hike in CRR to 5 percent by end-FY23 to move the liquidity conditions towards the pre-pandemic levels.
Anjana Potti, Partner, J Sagar Associates (JSA)
With the retail inflation at 7.79 percent for April 2022, the highest since May 2014, the recent statements from the Governor, and signals from other major central banks, the hike does not come as a surprise. The only question that remained was how much of an increase in the short term would address this.
The RBI is fighting an uphill battle in the current geopolitical situation to keep inflation below the benchmark of 6 percent, which it has missed for the past four quarters. We can expect further jumps in the next few quarters. The recent off-cycle hike has had an impact on the housing sector which had started picking up after two years of a lull, and this increase is going to dampen the spirits of homebuyers. The manufacturing sector will also see a pull back on the numbers as the retail purse strings tighten.
Lincoln Bennet Rodrigues, Chairman & Founder, The Bennet and Bernard Company
The current round of hikes could make the buyers apprehensive and they might as well adopt a wait and watch attitude. But on a positive note, the continued wage and job growth in varied sectors will provide a cushion in the short term for the purchasing decisions. We are hopeful that an improved homebuyer attitude and preference for owning a house will support the housing market and we expect that consumer demand will remain buoyant in the near term. The rate hike won’t have a significant impact as home loan interest rates have already gone down substantially in the recent past and buying decisions may not be altered by these marginal changes. The outlook for India Inc looks positive with higher affordability and disposable income in the hands of new-age investors.
Amit Goyal, CEO, India Sotheby's International Realty
RBI's decision to hike the policy rates is on the expected lines. With inflation lingering obstinately high, RBI had little choice. We hope the hike in repo rate would rein in rising commodity prices and ensure sustainable growth in the long term. At the same time, we don't see any major impact on the demand side in the housing market, which continues to remain strong. We are hopeful with the supply side measures taken by the government, inflation will cool down by the year-end, and the central bank will revert to a lower interest rate regime.
Sujan Hajra - Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers
The 50 bps rate hike by the Reserve Bank of India today is higher than our expectations of a 40 bps rate hike. The measures today are consistent with sharply upwardly revised inflation and unchanged growth projections for the current financial year by the Reserve Bank. Also, continued high inflation, aggressive rate hike plans of the US Federal Reserve, strengthening of the US dollar and portfolio capital outflow from emerging market economies including India are factors that influenced the decision of the Reserve Bank of India. The central clearly is front-loading the monetary policy tightening to normalise the rate to the pre-pandemic level quickly.
Thereafter, the Reserve Bank is likely to scale down the extent of rate hikes to installments of 25 bps each. At the peak, we expect the Reserve Bank of India to take the repo rate to the 6-6.5 percent range during the ongoing rate hike cycle. While the major part of the rate hike by the Reserve Bank of India is 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.
Sharad Mittal, Director and CEO, Motilal Oswal Real Estate Funds
Decadal low mortgage rates coupled with other govt driven incentives and increased value of homeownership during the pandemic provided much-needed stability and momentum to the real estate sector. The robust uptake in the demand has continued despite recent inflationary pressures on commodity prices and adverse supply chain constraints.
RBI in its last two MPC meetings has hiked interest rates in order to keep the rising inflation under check. Now with mortgage loan rates set to go up, we may notice a slight demand blip in the short term but the overall outlook on the sector remains strongly bullish in the long term.
In an interesting move, RBI has now allowed rural cooperative banks to lend towards residential housing projects. This will help improve much-needed liquidity in the sector.
Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India
The MPC has dropped the words “remain accommodative” and indicated that it is focused on the withdrawal of accommodation; this is possibly suggesting a “neutral to calibrated-tightening” stance. The bond markets have heaved a sigh of relief as the rate hike came in as per expectations, and RBI did not increase the CRR any further. RBI’s ongoing measures around withdrawal of liquidity have been broadly successful in bringing down systemic liquidity. Although the bond markets have reacted positively to the policy, yields will continue to be under pressure over the next few weeks and drift upwards. Key factors to watch out for going ahead, are how the food inflation pans out and the government’s borrowing programme and the ongoing auction supply.
Yesha Shah, Head of Equity Research, 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 takeaway. The MPC also increased its CPI estimates to 6.7% from 5.7% for FY23, which now appears to be a more realistic level. This contributes to enhanced creditability 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.
Abheek Barua, Chief Economist, HDFC Bank
Today’s monetary policy announcement was aggressive and moves beyond just “frontloading” of interest rate increases. The central bank seemed far more concerned about inflation --- reflected in its upward revision in its inflation forecast by 100bps to 6.7%—and relatively more sanguine on domestic growth impulses. Clearly, the RBI is concerned about the broad-based nature of the increase in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level, close to 6% by fiscal year-end.
Dhananjay Sinha, MD & Head –Strategist, JM Financial Institutional Securities Limited
Two risks on external balance are pronounced, a) widening trade deficit and b) continuous portfolio retrenchment due to tightening global financial conditions. The sequence of corrections in global commodity prices and recent restrictions on exports (steel, iron ore, agri produce) would imply a deceleration in exports while oil imports continue to remain elevated in the foreseeable future. This will continue to see a widening trade deficit. The combination of external vulnerabilities and higher fiscal deficits will complicate matters for RBI as it juggles between multiple objectives of inflation control, orderly currency and Gsec yield scenario. What can change the medium-term scenario is the possibility of a global recession or a hard landing translating into an early financial market capitulation and collapse in global commodity prices.