Rate hikes are bad for the market, for they decrease the liquidity in the system, and raise the borrowing cost of the companies as all sorts of loans, including business loans become expensive.
Besides, when rates rise, investors start looking away from riskier equities and begin to see more value in bonds and other government securities.
A 50 bps hike in repo rate on June 8 did not hit the market hard. In fact, the market benchmark Sensex was in the red before the announcement on key lending rates and when the RBI governor Shaktikanta Das announced the MPC (monetary policy committee) decisions, Sensex rose more than 300 points.
However, the market gave up all gains and ended in the red, down 215 points.
Why did the market rise and fall?
Market participants and analysts pointed out two factors that gave relief to the market:
1. Rate hike on expected lines: A 50 bps rate hike was on expected lines. The market might have seen a knee-jerk reaction if the rates were raised more than 50 bps because that would have signalled the inflation was going beyond control. Besides, the expectation is that the RBI will go for a gradual hike and a sudden and steep hike can give the shocks to the economy.
"The RBI’s decision of hiking the repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to the marginally positive real policy rate," said Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.
"No surprise is the best thing out of the RBI MPC and the increase in Repo Rate is on expected lines. The policy also reflects inflation expectations and there are factors on both sides which will play out over the next couple of months which will be very important in how the next policy action happens," said Vivek Bansal - Group CFO, InCred.
Yash Gupta- Equity Research Analyst, Angel One also said that the rate hike was on expected lines and after the commentary of the RBI governor last month, the market has already expected a rate hike of 50bps in the June meeting.
"We believe that this rate hike is already priced in the market. Overall the policy is in the expectation of the market, 50 bps rate hike is already priced in the market now the market focus will be on the Fed rate hike," said Gupta.
2. The steady growth forecast: RBI's tone that the economy was on a steady ground seems to have comforted the market.
The RBI retained the FY23 GDP growth forecast at 7.2 percent with Q1 (April-June) GDP growth forecast at 16.2 percent, Q2 (July-September) GDP growth forecast at 6.2 percent, Q3 (October-December) GDP growth forecast at 4.1 percent and Q4 (January-March '23) GDP growth forecast at 4 percent.
"The recovery in domestic economic activity is gathering strength. Rural consumption should benefit from the likely normal southwest monsoon and the expected improvement in agricultural prospects. A rebound in contact-intensive services is likely to bolster urban consumption, going forward," said RBI.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services pointed out that RBI's projections of a 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," said Vijayakumar.
Overall, the market looks satisfied with the June MPC outcome and looks forward to the US FOMC outcome next week which will influence the near term course of the market.
Since the expected has happened in terms of rate hikes, the market has shifted its focus back on the US FOMC outcome and the Ukraine war. The persisting concerns are there that the market cannot ignore.
Disclaimer: The views and recommendations made above are those of individual analysts and not of MintGenie.