By Lakshmi Iyer

As expected, the monetary policy committee (MPC) hiked the repo rate by 35 basis points (bps) to 6.25%. The hike in December was the 5th time in a row MPC has hiked policy rates. While the RBI action was in line with our expectations, the tone, however, has a cautious undertone. The tone was more hawkish, with a lot of emphasis on higher inflation and the need to manage inflationary expectations. The RBI also indicated that if inflation does not moderate, they may continue to increase repo rates, though in smaller sizes. The markets were geared towards a rate hike – but expected a dovish undertone, which meant some disappointment on the yield front. The RBI also lowered the FY2023 real GDP growth by 20 bps to 6.8% from the earlier 7%.

Also read: Financial stability is one of the key objectives of the Reserve Bank of India and it was interesting to see how the global risks still continue to threaten the financial stability from an India standpoint. Stressed supply chains have resulted into de-globalization with many countries exploring near shoring and protectionist measures, to protect their own national interests. The result will be market imperfections which will have an impact on inflation. Read full story here.

But on the growth front, it does not seem to be a significant concern for India. However, global headwinds may continue to dominate. Before the pause, we could see one more rate hike in the February policy, taking the repo rate to 6.50% in FY2023. Incremental rate hikes would also be a function of what the US FOMC guides the rest of the world.

Also read: The Reserve Bank of India Monetary Policy Committee is widely expected to deliver one more repo rate hike in February 2023, before pausing the hike cycle, even as the full impact of past rate hikes and liquidity tightening measures is yet to be seen amid moderation in inflation, analysts said. Read full story here.

Banking system liquidity may continue to remain tight, though RBI’s willingness to act promptly has been demonstrated amply. The Bond markets could remain range-bound. However, the floor for rates could be ~7.25% on the 10-year benchmark. Similarly, the rupee could trade range-bound, while there could be pressure given the robust imports and relatively tepid exports. In such a scenario, a credit growth-led rise in bank term deposit rates seems imminent, offering investors a chance to stagger investments at opportune times.

(The author is the CEO – Investment Advisory of Kotak Investment Advisors Ltd. The views and opinion expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak Group.)