Central banks across the world are facing a tough situation. While they are still struggling to bring inflation down sustainably, they are also visibly nervous about the signs of stress in the financial system.
Nevertheless, most of them have decided to stay focused on their primary task - keeping inflation under control. For instance, the US Federal Reserve in its latest policy in March 2023 hiked the key interest rate by a quarter (25 basis points) of a percentage point. The Bank of England also hiked interest rate by 25 basis points. The European Central Bank also hiked rate by 50 basis points in March.
But the Reserve Bank of India (RBI) decided to bite the bullet on rate hikes. It surprised the markets by taking a pause on rate hikes despite the headline inflation staying well above 6 percent in the previous two months. However, it kept the options open for itself while maintaining the 'withdrawal of accommodation' stance.
RBI said the fight against inflation continues. There are fresh concerns on the front of inflation such as the sharp uptick in crude oil prices as the demand scenario has got a boost after China's economic recovery. Besides, the output cut announced by the OPEC+ countries will result in a reduced supply of oil which will also support its prices.
But the market is happy.
Sensex rose over 250 points after RBI Governor Shaktikanta Das announced a pause in rate hikes and exuded optimism over the country's economic growth and inflation trajectory.
"India’s real gross domestic product (GDP) is expected to have recorded a growth of 7 percent in 2022-23. Hence, economic activity remains resilient. Real GDP growth for 2023-24 is projected at 6.5 percent, with Q1 at 7.8 percent, Q2 at 6.2 percent, Q3 at 6.1 percent, and Q4 at 5.9 percent. The risks are evenly balanced," RBI Governor Shaktikanta Das said.
"CPI (retail) inflation is projected to moderate to 5.2 percent for 2023-24, with Q1 at 5.1 percent, Q2 at 5.4 percent, Q3 at 5.4 percent, and Q4 at 5.2 percent," Das said.
It is just a pause, not a cut
A pause on rate hikes is a major relief for market participants. But one should remember that the fight against inflation is not over yet and the next move of the RBI will be data-driven. Also, it is just a pause and not a cut which means rates are still at a higher level.
Anil Rego, the founder and fund manager at Right Horizons PMS, pointed out that there is a possibility of rate hikes peaking at 5.25 percent in the US as the recent banking crisis makes careful calibration a requirement. But any changes to that will make emerging markets vulnerable and RBI will react accordingly to price in the uncertainties with further hikes if necessary.
"The rising uncertainty in international financial markets and imported inflation pressures need to be monitored," said Rego.
Moreover, if crude oil prices remain on an elevated track for a long time, RBI may have to rethink its move. However, if inflation remains under control, as the RBI expects, the central bank may maintain a pause. A cut in rates is unlikely in 2023.
"The RBI opting for a pause seems to suggest that the central bank expects softer inflation and growth. With this, it seems that the RBI has come to the end of rate hikes for this cycle. Unless there was a big surprise either on inflation or growth, we expect the RBI to remain in pause mode during 2023," said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, is of the view that this policy was a hawkish pause as the tone of the policy remains concerned with inflation, especially core inflation and remains focused on reaching the 4 percent target over the medium term.
"We expect the RBI MPC to remain on an extended pause. The scope for further hikes is limited given our growth-inflation outlook and the impact of the past rate hikes on the same," said Rakshit.
What should your market strategy be?
This pause is a positive trigger for the market but analysts warn investors should not get carried away. They need to keep a close watch on how the macroeconomic indicators move in the coming months and how India Inc.'s fourth-quarter earnings come out.
Sonam Srivastava, the founder of Wright Research- an investment advisory firm, underscored the RBI MPC's decision to maintain the repo rate unchanged is expected to create positive momentum in the market, especially for the banking sector, while the focus on the gradual 'withdrawal of accommodation' is also reassuring for the market, as it ensures the sustainability of the economic recovery in the long run. Sectors such as real estate and infrastructure are also expected to benefit from the current economic growth trajectory.
However, Srivastava added that the market will be closely monitoring any future announcements by the RBI Governor regarding inflation and global banking instability, as they may impact the market's momentum.
Vinod Nair, Head of Research at Geojit Financial Services, believes the pause in rate hikes will stimulate both equities and bonds and even though there may be some volatility in the market, the consolidation period may be inching towards its last phase.
"The pause decision had surprised the market with a hunch of a presumptive peak of interest yield. It will have a Midas touch on the market in the near term, stimulating both equities and debt papers," said Nair.
"In hindsight, the gap between current and target inflation is large, indicating that the pause will have to last for a long period and depends on the evolution of high-frequency economic data. This can increase the volatility in the coming months. However, investors can presume that the long consolidation period of the market is edging towards its last phase, and the environment will brighten up by the end of the year," Nair said.
Some analysts see a possibility of profit-booking and advise to sell now and buy in the future.
"The market is in a good mood, and this policy provides us with further cause to rejoice. However, given that we have witnessed a good recovery from recent lows and that we have a long weekend and a weekly expiry, some profit-taking or consolidation cannot be ruled out. The market's overall tone has changed to positive in the near term. If you have cash then sell, and buy in the future," said Santosh Meena, Head of Research at Swastika Investmart.
Jaideep Arora, CEO, Sharekhan by BNP Paribas is positive on equity markets and expects interest rate-sensitive sectors like real estate, auto, banks, and financials along with engineering/capital goods to lead the rally in the near-to-medium term.
Arpit Jain, Joint MD at Arihant Capital believes rate-sensitive sectors like real estate and automobiles may be the major beneficiaries in a resurgent stock market as the economic outlook is positive due to the prospects of a strong crop season and low inflation.
"Despite the potential negative impact of El Nino on the agricultural sector, a strong Rabi season is expected to lead to increased crop production and lower food prices. Additionally, global commodity prices have softened from their recent highs, which is positive news for the Indian economy," said Jain.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.