BENGALURU – The Reserve Bank of India’s key interest rate was raised by 50 basis points on Wednesday as widely expected, the second hike in as many months, in a bid to cool persistently high inflation in Asia’s third-largest economy.
The central bank also dropped the long-standing phrase that future policy would remain ‘accommodative’, reinforcing expectations of further rate hikes and other forms of tightening in coming months as fighting inflation becomes its main focus.
“Upside risks to inflation as highlighted in last policy meetings have materialized earlier than expected,” RBI Governor Shaktikanta Das said after the policy decision.
The monetary policy committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 4.90%. The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 4.65% and 5.15%, respectively.
COMMENTARY
RAHUL BAJORIA, MD AND CHIEF INDIA ECONOMIST, BARCLAYS, MUMBAI
“The RBI revised up its inflation forecasts, but kept its growth projections. This signals its intention to keep inflation at the centre of its decision-making, and a desire to return to the pre-COVID-19 policy stance as soon as it can. We now expect the policy rate to reach 5.75% by December, from 5.15% earlier.”
“Based on today’s moves, if the inflation outlook does not improve and downside growth risks do not rise materially, we think the RBI will continue on its rate hiking trajectory, taking the policy rate to 5.25% by delivering a 35 bps hike in the next meeting in August. The central bank also indicated that inflationary pressures have become more entrenched, which has taken place much faster than it was expecting.”
“As today’s policy outcome was broadly along expected lines, we think this sends a very strong signal that the central bank no longer feels the need to go beyond market expectations in delivering rate hikes.”
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, GURUGRAM
“Today’s monetary policy announcement was aggressive and moves beyond just ‘front-loading’ of interest-rate increases. The central bank seemed far more concerned about inflation — reflected in its upward revision of its inflation forecast by 100 bps to 6.7% — and relatively more sanguine on domestic growth impulses.”
“Clearly, the RBI is concerned about the broad-based nature of the increase in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level, close to 6% by fiscal year-end.”
“Bond yields saw an initial relief rally post the policy announcement as the rate hike was broadly priced-in and the fear of a larger rate increase or a CRR hike has been alleviated. That said, with elevated oil prices and rising global yields, this rally is likely to be short-lived and yields could march north yet again.”
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI
“The RBI raising repo rate by 50 bps is understandable, given that they have raised their inflation projection by 100 bps for FY23. However, it is not clear why they have not factored in their today’s policy action while making the inflation projection. Given the pace of price increases globally, it is quite clear that the RBI will front-load the interest rate increases in the next few policy reviews.”
SUJAN HAJRA – CHIEF ECONOMIST AND EXECUTIVE DIRECTOR, ANAND RATHI SHARES AND STOCK BROKERS, MUMBAI
“The measures today are consistent with sharply upwardly revised inflation and unchanged growth projections for the current financial year by the Reserve Bank of India. Also, continued high inflation, aggressive rate hike plans of by the U.S. Federal Reserve, strengthening of the U.S. dollar and portfolio capital outflows from emerging market economies, including India, are factors which influenced the RBI’s decision. The central bank clearly is front-loading the monetary policy tightening to normalise the rate to the pre-pandemic level quickly. Thereafter, the RBI is likely to scale down the extent of rate hikes to instalments of 25 bps each.”
RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE
“The 50 bps hike, along our expectations, confirmed the primacy of price stability as a policy goal to prevent a 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 a more neutral gear, with a hawkish bent.”
GARIMA KAPOOR, ECONOMIST — INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI
“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 10-year bond yield to gradually move towards 8% over the next four to six months.”
INDRANIL PAN, CHIEF ECONOMIST, YES BANK, MUMBAI
“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.”
KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU
“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 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%.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
“The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We expect 35 bps repo rate hike in the August policy to 5.25% and repo rate at 5.75% by end-FY2023. Along with pushing the repo rate to 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% from 5.7% in April was also in line with our expectations, but still lower than our forecast of 7.2%. 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% reverse repo to revised 4.90% repo rate. We expect peak repo rate in the current tightening cycle at 6% given that CPI inflation is likely to average 5% to 5.5% 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% 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.”
(Reporting by Tanvi Mehta, Nallur Sethuraman, Rama Venkat, Chris Thomas and Chandini Monnappa in Bengaluru; editing by Uttaresh.V)
