Expect repo rate hikes in June, Aug too; 75 bps hike in FY23 likely: SBI Ecowrap
The rate cycle has made a U-turn and RBI is likely to continue to increase the rates to reach the pre-pandemic level of 5.15 per cent by March 2023, the report added.
- May 5, 2022,
- Updated May 5, 2022 8:30 AM IST
SBI’s research report Ecowrap stated that following the ‘off-cycle’ repo rate hike announced by RBI Governor Shaktikanta Das on Wednesday, more hikes are likely in the coming Monetary Policy Committee meetings. The SBI Ecowrap stated that repo rate hikes are likely in June and August too, taking the total rate hike in FY23 to 75 bps.
This comes after RBI announced a repo rate hike of 40 bps, taking the benchmark interest rates to 4.40 per cent. This is the first rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the repo rate. The MPC also hiked CRR (cash reserve ratio) by 50 basis points to 4.5 per cent from May 21.
The rate cycle has made a U-turn and RBI is likely to continue to increase the rates to reach the pre-pandemic level of 5.15 per cent by March 2023, the report added. The CRR hike “will exert further upward pressure on interest rates while sucking system liquidity by additional Rs 87,000 crore”, it stated.
The SBI report stated that these hikes kept the broader markets in the tenterhooks. “The sinking realization that inflationary concerns were non-transitory has made almost all the central banks to take hurried measures in chalking a different pathway, one more tilted towards pausing the accommodative stance while sucking the gushing liquidity unleashed during pandemic, it added.
It added that the US Federal Reserve has taken one of the most aggressive stances by announcing steep hikes to rein in spiraling prices – the most in the last four decades. “EU countries are steadfastly gearing in to step up the throttle while emerging economies like Brazil and Russia (war and sanctions already blowing air out of its system) embracing key rates in double digits indicating its an all wager war for most of the nations, with elevated energy and commodity prices expected to remain in upper echelons for more me than earlier anticipated,” it added.
The SBI Ecowrap stated that the rise in CRR and repo rate would increase the marginal cost of funds based lending rate (MCLR) marginally. If banks increase deposit rates then the cost of funds (CoF), which will push MCLR too. It stated that the rate hikes will ultimately be good for the banking sector.
“High Government borrowing has ruled out the possibility of OMO sale, thus CRR increase seemed as the possible non disruptive option of absorbing the durable liquidity. We believe this opens up space for RBI to conduct liquidity management in future through OMO purchase to address duration supply while absorbing some part of the durable liquidity,” it added.
Also read: RBI Guv Das announces hike in interest rate by 40 bps to 4.40% in 'off-cycle' MPC meet
Also read: Repo rate hiked by 40 bps: 5 reasons why RBI Guv Das shocked the market
SBI’s research report Ecowrap stated that following the ‘off-cycle’ repo rate hike announced by RBI Governor Shaktikanta Das on Wednesday, more hikes are likely in the coming Monetary Policy Committee meetings. The SBI Ecowrap stated that repo rate hikes are likely in June and August too, taking the total rate hike in FY23 to 75 bps.
This comes after RBI announced a repo rate hike of 40 bps, taking the benchmark interest rates to 4.40 per cent. This is the first rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the repo rate. The MPC also hiked CRR (cash reserve ratio) by 50 basis points to 4.5 per cent from May 21.
The rate cycle has made a U-turn and RBI is likely to continue to increase the rates to reach the pre-pandemic level of 5.15 per cent by March 2023, the report added. The CRR hike “will exert further upward pressure on interest rates while sucking system liquidity by additional Rs 87,000 crore”, it stated.
The SBI report stated that these hikes kept the broader markets in the tenterhooks. “The sinking realization that inflationary concerns were non-transitory has made almost all the central banks to take hurried measures in chalking a different pathway, one more tilted towards pausing the accommodative stance while sucking the gushing liquidity unleashed during pandemic, it added.
It added that the US Federal Reserve has taken one of the most aggressive stances by announcing steep hikes to rein in spiraling prices – the most in the last four decades. “EU countries are steadfastly gearing in to step up the throttle while emerging economies like Brazil and Russia (war and sanctions already blowing air out of its system) embracing key rates in double digits indicating its an all wager war for most of the nations, with elevated energy and commodity prices expected to remain in upper echelons for more me than earlier anticipated,” it added.
The SBI Ecowrap stated that the rise in CRR and repo rate would increase the marginal cost of funds based lending rate (MCLR) marginally. If banks increase deposit rates then the cost of funds (CoF), which will push MCLR too. It stated that the rate hikes will ultimately be good for the banking sector.
“High Government borrowing has ruled out the possibility of OMO sale, thus CRR increase seemed as the possible non disruptive option of absorbing the durable liquidity. We believe this opens up space for RBI to conduct liquidity management in future through OMO purchase to address duration supply while absorbing some part of the durable liquidity,” it added.
Also read: RBI Guv Das announces hike in interest rate by 40 bps to 4.40% in 'off-cycle' MPC meet
Also read: Repo rate hiked by 40 bps: 5 reasons why RBI Guv Das shocked the market