The Reserve Bank of India (RBI) surprised many on April 6 by keeping the repo rate unchanged at 6.5 percent while maintaining the 'withdrawal of accommodation' stance to remain prepared to act on rates should the situation warrant.
The Monetary Policy Committee (MPC) of the RBI voted unanimously to keep the repo rate unchanged. The central bank had increased the repo rate by a total of 250 basis points since May in a bid to contain inflation.
RBI Governor Shaktikanta Das said that the MPC’s decision to pause repo rate hike is for this meeting only and the fight against inflation will continue until there is a durable decline in inflation. RBI aims to contain inflation to the zone of 2-6 percent.
The domestic market appears to be happy with the RBI surprise. The Sensex, which opened lower, rose over 200 points after the RBI Governor announced a pause on rate hike.
We collated the views of many experts on the RBI MPC meet outcome. Take a look:
Nilesh Shah, MD, Kotak Mahindra Asset Management Company
The RBI’s pause is like Sachin's stroke on a tricky pitch but with eyes set and having the luxury of hitting the ball wherever he wanted. The RBI had the option of a rate hike or a pause. The pause was not entirely unexpected.
The RBI will watch developments and data before taking the next call. The market expects the RBI to fetch maximum run and win the match on inflation and growth, no matter which direction they hit the ball.
Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers
With inflation still elevated and recent rate hikes by most major central banks, the chance of a 25-bps rate hike was considerable.
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.
Sandeep Bagla, CEO of Trust Mutual Funds
RBI/MPC has taken a pause and kept the repo rate unchanged, against the majority market view. The stance remains unchanged at the enigmatic 'withdrawal of accommodation’.
We expect GDP and inflation to be significantly below RBI year-end estimates of 6.5 percent and 5.2 percent, respectively.
Interest rates are likely to soften considerably from current levels.
Bonds will perform well this year, generating capital gains over and above the coupon rates. Passive investments like fixed deposits will underperform debt funds.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
The decision to pause at 6.5 percent was a positive surprise. We believe the RBI is concerned about the uncertainty in global financial markets and the pause is reflective of this concern.
We view this policy as a hawkish pause. 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.
The RBI remains comfortably on the growth front, for now. We believe the risks to this outlook are skewed towards the downside.
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.
Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company
The MPC’s unanimous pause is a reflection of the economic uncertainties surrounding policymaking today. However, as emphasised by the RBI Governor, this pause may not be interpreted as the end of the battle against inflation.
The bond market narrative will now shift focus on how long will the MPC need to persist with existing tightness in monetary policy.
In the absence of a major global event, we expect an extended pause in the domestic repo rate. This is because, while the inflation is likely to soften in FY24, we are far from MPC’s eventual target of 4 percent headline CPI.
Overall, we expect domestic yields to remain range bound until clarity over the future direction of policy rates emerges.
Additionally, the ongoing steepening trend in the sovereign yield curve will be reinforced as a result of this policy. We expect 10-year G-Sec to trade in the 7.10-7.40 percent range in the near term.
Santosh Meena, Head of Research, Swastika Investmart
The RBI astonished the market by pausing policy rates; however, there were talks about this unexpected statement, which keeps it ahead of other major central banks worldwide.
When symptoms of growing inflation first appeared, the RBI was one of the few central banks to begin raising interest rates. As a result, this RBI approach can be interpreted as an indication that global interest rates are about to peak.
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.
Jaideep Arora, CEO, Sharekhan by BNP Paribas
Contrary to expectations of a 25 bps hike in the policy rate, RBI has decided to take a pause in interest rate hikes this time around.
However, it has kept the window open for further action on interest rates depending upon the incoming economic data and changes in the global macro scenario. Interestingly, the decision to not go for a rate hike is a unanimous decision by members of the MPC.
Also, for fiscal 2023-24 (FY24), the projections for real GDP growth rate increased to 6.5 percent (up from 6.4 percent earlier and higher than the projections by World Bank and IMF) while the forecast for retail inflation is reduced to 5.2 percent as against 5.3 percent earlier.
The overall commentary is also quite positive with expectations of broad-based growth in the economy with financial stability reflected in the rising forex reserves and current account deficit under control.
Markets are reacting positively to the policy with the easing of bond yield and an upsurge in interest rate-sensitive stocks.
We remain positive on equity markets and expect 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.
Amar Ambani, Head of Institutional Equities, YES Securities
RBI unanimously decided to stand pat on the policy rate, positively surprising the markets, though, some market participants did pencil in a pause at the April MPC meeting.
The central bank justified the pause, citing global economic headwinds and the rationale that the cumulative rate hikes of 250bps will certainly work with a lag to arrest inflation.
However, RBI cautioned that it is open to policy action if inflation persists above the tolerance level. Pertinently, it maintained its stance on the withdrawal of accommodation.
On inflation projections, FY24 CPI is projected to average 5.2 percent, when compared with the earlier estimate of 5.3 percent.
On growth, RBI emphasized the resilience of the economy and sees FY24 GDP expanding at 6.5 percent, marginally higher than the earlier estimate of 6.4 percent.
We see that RBI is over-optimistic on growth given that consensus projections call for 6 percent GDP growth for FY24. On the interest rate trajectory, we now clearly see 6.5 percent as the terminal repo rate and effectively now rule out any rate hikes during this year, notwithstanding the rhetoric from RBI regarding the possibility of further policy action.
With India’s real rates projected to remain positive around 130bps for FY24 and emerging global concerns about financial stability, we reckon that RBI will likely sit tight on the policy rates for quite some time.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS
The RBI’s decision to keep policy rates unchanged versus a consensus expectation of a 25 bps rate hike was surprising and hints at the regulator's focus on maintaining growth.
While the pause is purely for this policy, the regulator has not ruled out any further rate hikes, if need be, and would be largely data-driven.
The Indian banking sector remains healthy, with due credit to the regulator’s stringent regulations. We expect the systemic credit growth to remain buoyant for the Mar’23 quarter.
However, management commentaries on growth momentum sustenance going into FY24 would be crucial. While banks have seen a sharp NIM expansion so far, headwinds on margins will surface as banks step into FY24.
Aurodeep Nandi, India Economist and Vice President at Nomura
Enough (tightening) might just be enough was the overarching message from the RBI in the April meeting.
We were out of consensus in forecasting that the RBI would pause and keep its stance at ‘withdrawal of accommodation’ – which is exactly what was delivered.
In our view, this reflects a forward-looking monetary policy that takes into cognizance elevated global growth risks, under-control inflation trajectory, and the need to wait and watch and assess the impact of the sharp policy tightening already delivered.
However, the RBI has kept the door open to further action if macro conditions change, also in line with our expectations. We maintain our view of a policy pause hereon and 75bp of rate cuts, starting from October.
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.
