RBI likely to deliver up to 60bps rate hike in coming months; FY23 terminal repo rate seen at 6.4% | The Financial Express

RBI likely to deliver up to 60bps rate hike in coming months; FY23 terminal repo rate seen at 6.4%

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday raised the repo rate by 50 basis points for the third consecutive time to 5.9%.

RBI likely to deliver up to 60bps rate hike in coming months; FY23 terminal repo rate seen at 6.4%
RBI Governor’s confidence that GDP growth rate for FY23 will remain at 7% instills belief that India may continue to outshine other economies. Image: Blomberg

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday raised the repo rate by 50 basis points for the third consecutive time to 5.9%. The central bank also retained its stance on remaining focused on withdrawal of accommodation. The rate is in line with expectations as most economists and market experts had expected the RBI to front-load rate hikes in a bid to control inflation which has remained above RBI’s tolerance threshold of 6% for eight consecutive months. The central bank is expected to deliver another rate hike in its next MPC meeting. Economists see the terminal repo rate at 6.25-6.40% by FY23 end. Many experts are of the view that RBI and the Indian government are handling economy far better than their major global counterparts.

Also read: RBI Monetary Policy Committee hikes repo rate by 50 bps to 5.9%, cuts FY23 GDP growth forecast to 7%

RBI to front load interest rates in coming MPC meetings

The repo rate of 50 bps by RBI was in line with expectations amid core inflation being sticky, unfavourable global conditions, and the Indian rupee depreciating against the dollar, according to Naveen Kulkarni, Chief Investment Officer, Axis Securities. The RBI has retained its inflation estimates for FY23, with relief visible only from Q4 onwards. It also revised its growth estimates downwards to 7% for FY23. “With RBI data indicating strong credit growth, currently at a multi-year high, we believe most banks, especially those with a higher share of the floating rate will be better placed in the rising interest rate environment. However, the lagging deposit growth remains a cause of concern,” Kulkarni said. 

He added that while India is in a better place compared to many of its global peers, with domestic indicators showing continuous improvement, global factors such as ECB and US Fed’s indication of steeper rate hikes in the coming policies will continue to force the Reserve Bank of India RBI to front load interest rates in the coming MPC meetings as well.

Terminal repo rate likely to be 6.25-6.40% by FY23 end

According to Dhiraj Relli, MD & CEO, HDFC Securities, the 50 bps rate hike is justified in the backdrop of unbearably high inflation remaining. Economic growth has remained resilient in the face of an adverse global environment, said RBI governor Shaktikanta Das. However, the recent sharp depreciation in rupee might have weighed on members’ decision in favour of larger rate hikes, addressing external sector imbalance and reducing the interest rate differential, according to Relli. “Overall it was a prudent policy announcement with no negative surprises which is reflected in the impact on 10 year yield and stock markets. The next stage of response could be calibrated; we expect the terminal repo rate would be 6.25-6.40% by FY23 end,” he said.

Also read: GST collection in Sep likely to touch Rs 1.5 lakh crore on improvement in biz activities; what do experts say?

Scope for further reduction in surplus liquidity in the system

The RBI policy was more or less on expected lines which is also the reaction of the markets – stocks, bonds and currency. Given the commentary in the speech, one can expect a further 50-60 bps increase in rates in the coming months that can take the terminal rate to 6.4-6.5%, according to Madan Sabnavis, Chief Economist, Bank of Baroda. High inflation will be the chief driving factor as there are some upside risks to the number of 6.7% due to developments on the agricultural side, he said adding, “RBI does appear to be more confident on growth, where the target has been lowered marginally which appears to be more due to statistical reasons.”

“All the high frequency indicators show that growth will be stable this year with limited downside risk. The stance remains withdrawal of accommodation indicating that there is scope for further reduction in surplus liquidity in the system. The RBI has merged the 14 and 28 days variable rate reverse repo auctions, which is more to ensure that liquidity does not get locked in for a longer period of time creating spikes in the money market rates.” Sabnavis added.

Policy neutral and ready to act in response to both global and domestic incoming data

The key concerns seem to emanate from global factors and to a lesser extent domestic events. The RBI also is mindful of the currency movements given USD strength, according to Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company. “We view the policy as neutral and ready to act in response to incoming data, both global and domestic. Bond yields could see some respite buying in the near term, but would continue to closely monitor global yields, especially UST for way forward. Also weighing in on bond markets would be the likelyhood of India bonds’ inclusion in Index, which May not culminate anytime soon,” she said.   

RBI, govt handling economy far better than major global counterparts

RBI Governor’s confidence that GDP growth rate for FY23 will remain at 7% instills belief that India may continue to outshine other economies during the challenging global scenario, said Siddarth Bhamre, Head of Research, Religare Broking Ltd. Despite RBI guv mentioning the sharp rise in interest rates by FED as a third shock after COVID and Ukraine scenario, the outlook is not bleak. “Inflation and interest rates numbers then and now indicate, despite MPCs stance being that of withdrawal its policy is still accommodative which leaves more room for further hike in interest rates with less impact on growth,” Bhamre added. RBI Deputy Governor Michael Patra’s statement that, “soft-landing is for the developed economies, for India it’s a take-off” is positive. “We believe RBI and Government are handling the economy far better than their major global counterparts.” Bhamre said.

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