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RBI MPC hikes repo rate by 50 bps: Here's what experts say 

RBI MPC hikes repo rate by 50 bps: Here's what experts say 

RBI MPC announcement: The central bank hiked repo rate by 50 basis points (bps) to 4.90 per cent since inflation is above the central bank’s upper tolerance limit.

RBI Governor Das said that India’s real GDP growth is pegged at 7.2 per cent for 2021-22 and inflation forecast for 2022-23 stands at 6.7 per cent.   RBI Governor Das said that India’s real GDP growth is pegged at 7.2 per cent for 2021-22 and inflation forecast for 2022-23 stands at 6.7 per cent.  

Reserve Bank of India’s monetary policy committee (RBI MPC) meeting outcome was riddled with surprises for consumers, banks, and the economy at large. The central bank hiked repo rate by 50 basis points (bps) to 4.90 per cent since inflation is above the central bank’s upper tolerance limit. The standing deposit facility (SDF) rate and marginal standing facility rate (MSFR) stood at 4.65 per cent and 5.15 per cent respectively.  

RBI Governor Das said that India’s real GDP growth is pegged at 7.2 per cent for 2021-22 and inflation forecast for 2022-23 stands at 6.7 per cent.  

Graphic: Pragati Srivastava
Graphic: Pragati Srivastava
Graphic: Pragati Srivastava

Justifying the repo rate hike, Secretary of Finance Ministry’s Department of Economic Affairs (DEA) Ajay Seth said, “RBI has taken the steps needed for the economy as there are domestic and global challenges. The entire effort is to moderate inflation but at the same time keep the growth efforts as earlier.”

Here’s how experts look at the recent announcements by the central bank 

Radhika Rao, Economist, DBS Bank 

"The 50-bps hike, along with our expectations, confirmed the primacy of price stability as a policy goal to prevent hardening in adaptive inflationary expectations. Amid signs that price risks are broadening out and turning persistent, front-loaded action will be key. Whilst acknowledging the host of relief measures enacted by the government, the upward revision in the CPI forecast is likely to raise the terminal policy rate in this cycle. Notably, the term accommodative was dropped from the commentary, implying a change in stance to more neutral gear, with a hawkish bent." 

Garima Kapoor, Economist — Institutional Equities, Elara Capital 

"With inflation expected to remain above the RBI's mandate through FY23, we expect the MPC to hike policy repo rate by an additional 40 bps this fiscal year and target a terminal repo rate of 6.25% in the current hike cycle." 

"Gradual tightening of domestic liquidity conditions, elevated crude oil prices, tightening of global financial conditions, and risks of overshooting of FY23 fiscal deficit are likely to put incremental pressure on the domestic bond yields. We expect the 10-year bond yield to gradually move towards 8 per cent the   over the next four to six months." 

Indranil Pan, Chief Economist, Yes Bank 

"The RBI remains aggressive with its inflation forecast and has possibly built in the worst scenario on inflation expectations for the moment. We still believe that the front-loading strategy will continue and thus pencil in another 40 to 50 basis points increase in the repo rate in the August policy." 

"Thereafter the RBI may have to be more lenient in the extent of increases, keeping in line with its current inflation trajectory which also points to a sub-6% number in the fourth quarter." 

Rajiv Agarwal, Operating Partner (Infrastructure), Essar and Managing Director, Essar Ports

“The Reserve Bank of India’s decision to raise repo rate by 50 bps was indeed expected. The change in stance from accommodative to withdrawal will ensure inflation remains within targets going ahead, however that could hamper some business opportunities. The economic growth of our country requires support from RBI and the strengthening of the banking system will further boost economic recovery. RBI's projections of GDP growth rate of 7.2% and inflation of 6.7% for FY23 remain realistic.”

Rajni Thakur, Chief Economist, RBL Bank 
 
“MPC decisions announced this morning- 50 bps hike in policy rates, resetting inflation projections and no change in CRR- were all broadly along the expected lines. Coming right after an inter-policy MPC in May, which kind of spooked the market a bit, RBI choosing to stay predictable this time will help sooth market sentiments. MPC’s CPI projections for FY23 at 6.7% now are more realistic in view of current geo-political uncertainties and their fall outs.  However, with multiple risks on price levels driven largely by external factors, the rate hikes will help anchor inflation expectations and impact the actual inflation outcome to a much lesser extent. This also, makes it difficult to gauge a terminal rate level for the cycle, even though, continual rate hike expectations till pre-Covid levels have been firmed up by the fact that Monetary Policy stance has changed from “accommodative with focus on withdrawal of liquidity” to “focus on withdrawal of accommodation”. We now expect a further rate hike of 50 bps in August, taking Repo rates higher than pre-Covid levels, followed by pause to re-access the macro-dynamics and hikes in smaller quantum thereafter pushing year end Repo-rates close to 6% levels.”

Kunal Kundu, India Economist, Societe Generale 

"The central bank stuck to its revised playbook of targeting inflation. For sure, multiple challenges are staring at the central bank's face — sharply higher inflation, rising bond yields, and weak growth prospects. Yet, the RBI rightly chose to address inflation despite knowing fully well that immediate supply-side challenges can barely be addressed by monetary policy. At this point in time, therefore, it is critical for the RBI to raise rates sufficiently to engineer a growth slowdown to check the potential passthrough of high input costs to output prices as the long-term economic cost of unaddressed inflation would be far more damaging. Yet, the RBI's projections show that inflation will only ease at a rather slow pace and would continue to remain well above the RBI's upward tolerance limit of 6.0 per cent." 

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities 

"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. We expect a 35-bps repo rate hike in the August policy to 5.25 per cent and a repo rate at 5.75 per cent by end-FY2023. Along with pushing the repo rate 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% by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels." 

Aurodeep Nandi, India Economist And Vice President, Nomura, Mumbai 

"Today's hike by 50 bps on top of an inter-meeting 40 bps hike in May is reflective of inflation elbowing its way to the top of the RBI's priority list and it belatedly looking to catch up with the curve. The RBI's upward revision of the inflation forecast for FY23 to 6.7 per cent from 5.7 per cent in April was also in line with our expectations, but still lower than our forecast of 7.2 per cent. So, we believe that we are still far from the finishing line and that more front-loaded rate hikes are on the offing." 

Prithviraj Srinivas, Chief Economist, Axis Capital, Mumbai 

"Including today's rate hike, the RBI has raised effective policy rate by 155 bps this year through a series of rate hikes and liquidity tightening measures — i.e. from 3.35 per cent reverse repo to revised 4.90 per cent repo rate. We expect peak repo rate in the current tightening cycle at 6 per cent given that CPI inflation is likely to average 5 per cent to 5.5 per cent in 12 to 18 months from now." 

Aditi Nayar, Chief Economist, Icra, Gurugram 

"While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 per cent remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies."  

Madan Sabnavis, Chief Economist, Bank of Baroda  

“The credit policy clearly indicates that the major threat to the growth process is inflation. While growth is expected to proceed on a stable path, inflation has to be addressed which has led to a unanimous decision to raise the repo rate by 50 bps. With inflation expected to be 6.7 per cent (BoB’s forecast is slightly lower at 6.5 per cent) this year, it will take a long time to move to a positive real interest rate regime.  

The higher interest rates will get transmitted directly to loans that are linked to external benchmarks such as home loans or SME loans. However, MCLRs will be slower to react in terms of quantum of change. The same will hold for deposit holders who will receive higher rates depending on how banks adjust their rates based on their funding requirements. As there is surplus liquidity currently in the system which can go for lending, the immediate response may be slow.  

The RBI’s optimism about growth is significant because the performance of the economy in the first two months is quite impressive. The interest rate hike will help to ensure that growth is not affected as unchecked inflation can affect discretionary consumption, which in turn will affect growth. Higher repo rate also means that the SDF rate has gone up which will help banks earn a higher return on surplus funds as it will be now at 4.65%.” 

Mr. Shishir Baijal, Chairman & Managing Director, Knight Frank India 

 “A repo rate hike of 50 bps was imminent given the current inflationary trajectory and geopolitical concerns. Although the government has taken various measures to control domestic inflation such as food export restriction and cut in excise duty, prolonged war and spike in global crude oil price is still worrisome.  

From a real estate perspective, home loans are set to get costlier. Banks have already raised the interest rate on home loan by 30-40bps since the earlier repo rate hike by the RBI in May and now with the repo rate cumulatively higher by 90 basis point there will be further increase in interest rate for homebuyers. Rising interest rate along with elevated property construction cost and product price pressures could adversely impact on the real estate buyer’s sentiment. We hope that economic recovery and household income growth will serve as a cushion for sustaining consumer demand in the face of this rate hike. Further, monetary policy tightening by central banks globally and any resolution on the prolonged Russia – Ukraine war will bring price stability”. 

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. It is now increased to 4.90%. 

A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales. 

Considering that inflation continues above its target zone of 6%, a hike was inevitable, and it will doubtlessly have some repercussions on housing uptake. The RBI is tasked with controlling the spiralling 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 the 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. Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12% and above. Nevertheless, 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.” 

Mitul Shah -  Head of Research at Reliance Securities

"The hike in repo rate by 50 bps by the reserve bank of India's MPC is broadly in line with the expectation. We expected RBI to continuously provide liquidity support through the LAF window to sustain the growth process and provide support to the government borrowing programme while controlling the hardening of yield through policy twists. Inflation has proved to be persistently high in the past three years, even as drivers have changed - from supply bottlenecks to commodities and reopening pressures. This is the step required to control elevated level of inflation to bring it down to expected range of  2-6%. We expect gradual rate hikes to continue in FY23."

Mr. Arun Kumar, Head of Research, FundsIndia 

“The rate hike of 50 bps was in line with market expectations. With this hike, RBI is closer to bringing the repo rate back to the pre-covid levels of 5.15%. The RBI has clearly acknowledged the inflation risks primarily driven by food and commodity prices and revised its FY23 inflation projection upwards by 100 bps to 6.7% (from 5.7% in the April meeting). The 2% to 6% inflation band is now expected to be breached for three consecutive quarters. Given this context, RBI is expected to front-load its rate hike actions. However, the growth forecast for FY23 remains unchanged at 7.2%. Overall, the focus at the current juncture is clearly on controlling inflation and the government has also joined the RBI in an attempt to contain inflationary pressures in the economy. As bond yields have increased over the last few months (factoring in for a large part of future rate hikes), debt fund yields are becoming more attractive (especially in the 3-5Y duration segments).” 

Dr. Ravi Singh, vice President and head of Research, Share India  

“In line with the expectation, RBI has increased the repo rate by 50 basis points and is already discounted by the market. The Ukraine Russia war has led to an increase in inflation globally beyond tolerance level and is affecting the economic growth. However, most of the industries are already facing headwinds due to steep increase in raw materials cost and fuel prices, and a hike in the rates will further increase the burden. The Fed is also increasing the rate so there is major possibility that apart from equity market, other markets like debt market and bond market may see some outflow anytime soon.  

Auto, Real estate, Banking and infrastructure stocks would be worst hit by the rate hike as loan financing is a major part of these sectors. FMCG, Insurance, Energy, Power and Utility sectors provides a cushion against rising interest rates.” 

 Mr. Atul Goel, MD, Goel Ganga Group  

“RBI’s recent step to increase the repo rate by 50 basis points has been on the expected lines. To curb inflation, the regulatory bodies in India were required to control liquidity circulation in the economy. For a few months, the inflation rate has been above 6%, which is beyond the RBI’s safe zone. If not controlled, the inflationary pressure could destabilize an otherwise bullish Indian economy. Although the recent step will increase the home loan rates, an unstable economy is not conducive to the overall health of the real estate industry. For the industry to operate optimally, it is important that the economy continues to grow in a stable, inclusive, and steady fashion.” 

Mr. Manoj Dalmia, founder and director Proficient equities Private Limited  

“RBI has raised the repo rate by 40-bps to 4.9 per cent, the inflation projection for this fiscal is 6.7% and will remain above the tolerance band of 2-6 per cent for three quarters in this fiscal, RBI still expects the economy to grow at a rate of 7.2 per cent. 

The SDF and MSF have been increased to 4.65 per cent and 5.15 per cent respectively, RBI is expected to reduce liquidity, reinforcing its fight against inflation and extending its effort to return monetary conditions. 

The cost of lending for banks is set to go up due to an increase in repo rate, retail loans will face direct impact due to this.” 

Mr. Suren Goyal, Partner, RPS Group  

“We welcome the step of the apex body to increase the overall repo rates by another 50 basis points. This will help in clamping down inflation and smoothen economic growth. A rise in inflation can soften the stance on an otherwise robust real estate industry. Already raw material prices are increasing and an unbridled rate of inflation will further drive the input costs northwards, therefore resulting in cost overruns for the developer fraternity. In such a case they will have no option but to pass on the price to the homebuyers. Meanwhile, the government should also make concentrated efforts to reduce the spike in prices of raw materials such as cement, bricks, steel, etc. This will also give some relief to the sector.” 

Mr. Ravi Singhal, Vice Chairman, GCL Securities Limited  

“Inflation target increased from 5.7 per cent to 6.7 per cent, exceeding the RBI's target of 4 per cent; repo rate increased by.50 basis point, and CRR remains positive for banking. The inflation target is for fiscal year 23.” 

Published on: Jun 08, 2022, 12:25 PM IST
Posted by: Mehak Agarwal, Jun 08, 2022, 12:17 PM IST