RBI rate hike: What signals it gave to Dalal Street investors

The monetary policy committee’s 35 basis points rate hike, which was less than the previous rate hikes but in line with Street expectations, could not cheer stock investors. If anything, the BSE Sensex fell over 350 points post rate hike. The RBI hinted at its intention to withdraw its accommodative stance and trimmed its GDP estimates for FY23 to 6.8 per cent, weighing on the market sentiment.  

“The inflation fight is not over” practically sums up today’s policy, said Garima Kapoor, Economist, Elara Capital. 

"With inflation expected to remain above 6 per cent till Feb-2023 and amid elevated and sticky core inflation prints, we anticipate MPC to hike policy rate by another 25-35 bps in February 2023," she said.

Naveen Kulkarni , Chief Investment Officer at  Axis Securities PMS said five out of six MPC members voted in favour of 35 basis points. "More importantly, it re-iterated intention of withdrawing accommodative policies with four members out of six voting in favour for it," Kulkarni said noting that the RBI has also reduced India's growth forecast for FY23 to 6.8 per cent from 7 per cent.

"The RBI governor exhibited confidence in India's growth trajectory but mentioned that it is crucial to be vigilant to the secondary effects of high global commodities, especially energy and food prices. We believe the MPC decisions today are on expected lines and would not have any major impact on Indian markets, purely based on decisions announced today," Kulkarni said.

Anil Rego,  founder, and fund manager at Right Horizons said the market’s momentum depends on how much the rate is hiked relative to expectations.

Surprises generally follow with volatility in the market; however, RBI has hiked the rates hike by 35bps, with was in line with the market expectations.

"When the interest rate rises, it impacts both the economy and the stock markets because borrowing becomes more expensive for individuals and businesses, having a ripple effect across sectors. Higher interest rates mean terminal values are lower as the discount rate used for future cash flow is higher," Rego said.

Besides, he noted, financial sector has historically been among the most sensitive to changes in interest rates. 

"Typically, during a rising interest rate scenario, the banking sector passes on rate hikes through the floating rate loans while delaying the rate hikes for deposits, benefitting from spreads, and expanding margins. We don’t see any material impact on the stock market but second order consumption impact we will watching closely, especially on the consumption side," Rego said.  

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