RBI Monetary Policy Committee Meeting Highlights: The RBI Monetary Policy Committee decided to hike the repo rate by 50 basis points to 5.9 per cent, as expected by most of experts. In the last 5 months, repo rate saw an increase of 190 bps (it stood at 4% in April, and it’s at 5.90% now). Reserve Bank of India’s Governor Shaktikanta Das said that the SDF rate stands adjusted to 5.65%. He added that RBI will remain focused on the withdrawal of accommodation. “Geopolitical situation was affecting demand-supply scenario. Global central banks were aggressively hiking rates at the cost of economic distress. Against this backdrop, the Indian economy remains stable,” Das said. He added that India has sustained the shocks of pandemic, Russia-Ukraine conflict.
The RBI guv said that the MPC had retained the projections for Consumer Price Index (CPI)-based inflation that were given earlier. CPI inflation for the current financial year is seen at 6.7 per cent, with the price gauge seen at 7.1 per cent in July-September, 6.5 per cent in October-December and 5.8 per cent in January-March. CPI inflation is seen at 5 per cent in the first quarter of the next financial year. Talking about India’s GDP growth Das announced that MPC has cut the real GDP forecast for the current fiscal to 7 per cent from 7.2 per cent earlier. GDP growth in July-September is seen at 6.3 per cent, and that for October-December is seen at 4.6 per cent. The growth in January-March is seen at 4.6 per cent and that for the first quarter of the next financial year is seen at 7.2 per cent.
“ RBI's rate hike of 50 bps to take the repo rate to 5.90% was in line with market expectations. Given the aggressive rate hiking cycle by the US Fed, the low spread between Indian and US bond yields, and the strengthening USD, we expect RBI to do one more rate hike of 25-35 bps in December to take the repo rate close to 6.25%. Thereafter, we expect a pause, and the future trajectory will depend on incremental macro data.”
~Arun Kumar, Head of Research, FundsIndia
“RBI raised Repo Rate by 50 bps to 5.9% from 5.4% with the central bank continuing to remain focused on the “withdrawal of accommodation” stance while supporting growth. Though inflation continues to be at elevated levels, the recent correction in the commodities and crude oil prices, if sustained, can ease the inflationary pressures. There was a growing concern about the fall in forex reserves and the RBI Governor came up with a statement that calmed these concerns by saying that 66% of the fall in forex reserves is due to the valuation changes arising due to appreciating dollar and higher bond yields. The economic Activities in India have remained resilient as highlighted by key data points like Bank credit growth accelerating to 14% against 7.9% a year ago, FPIs returning with $7.5Bn after an outflow for 9 consecutive months, External debt to GDP being the lowest amongst growing economies and Import growth decelerating compared to export growth. Real GDP growth for Q1FY23 at 13.5% which is above the pre-pandemic level and the expected decline in inflation in the coming quarters, demand is likely to gather pace. The policy is positive for the Banks and the nifty bank index can retest the 10 day EMA situated at 39000 levels.”
~Sandeep Bhardwaj, CEO, IIFL Securities
“The rate hike of 50 bps was expected given the inflationary headwinds faced by the RBI and depreciating INR against the US dollar. One expects the increase interest at environment to continue till the inflation get stabilised at 4% with a tolerance band of 2 to 6%. Aug 2022 inflation of 7% and hike by US Fed has resulted in another increase in the REPO rate. One would expect rise in borrowing cost for HFCs and NBFCs and resultant pass on to the end customer who are at floating rate. It makes sense for borrowers to carefully plan their borrowings taking into account increased rates in the loans. This rate increase may make FD rate attractive for depositors while the pass on by the banks on their liability side may be flat. One expects RBI to maintain this stance of increased rate regime till macros on inflation numbers are stabilised.”
Kalpesh Dave, Head Corporate Planning & Strategy, Star HFL
“India is the only large economy which is able to reduce the pace of hikes providing evidence that India's monetary policy is working whereas western countries are dealing with unprecedented inflation and strikes on pay and pensions. India is the only economy within top 5 of the world which will grow at 7% as projected by RBI. Circulation which affects velocity of money is another key instrument which RBI uses to hone in inflation with CRR and Reserve Ratios which are tools it has not yet touched. India is somewhat of a safe haven now and inflow of USD by FPIs will arrest the fall of rupee which will further strengthen the hands of RBI to control inflation via oil and discretionary imports. We do expect a narrowing balance of payments deficit in coming months. However for many countries things are not so good. We are seeing a currency crisis unfold in west where Japan intervened in forex market after 28 years, followed by Gilts breaching 4% on announcement of minibudget by UK's new PM and finally Bank of England stepping in to control gilts market and forex.”
Abhishek Banerjee, smallcase manager & Founder, Lotus Dew
"The policy stance is in line with the expectations of being accommodative along with focus on growth. There is a negative impact on GDP growth expectations of 4.6% in Q3 and Q4 considering impact of slowdown in large global economies. However, India would still continue to be better placed in terms of GDP growth and other macro factors. We expect another rate hike and the repo to settle around 6.5% in the near term. India is in a positive trajectory for now, all eyes would be on geo political tensions, opening up of China, commodity prices particularly energy and how slowdown pans out in large developed economies including US, UK, and European nations."
Divam Sharma, smallcase manager & Founder, Green Portfolio
“Amidst challenging global monetary policy backdrop, RBI stays with a 3rd consecutive rate hike of 50 bps and keeps a tight vigil on domestic inflation. Continuation with “withdrawal of accommodation” signals more rate hikes to come. External factors holding well as of now but needs to be monitored closely. Re-assurance on ample systemic liquidity provides relief to the shorter segment. Overall, in line with market expectations as of now but we expect market volatility to remain high with fast evolving global backdrop.”
~Vikas Garg– Head of Fixed Income, Invesco Mutual Fund
"The 50 bps hike by the RBI was very much on expected lines. Central banks across EMs and DMs are hiking rates to control the sticky inflation. The easy monetary policy has led to inflation rising to levels never seen in the past few decades. It is pertinent to keep the policy stance at the withdrawal of accommodation as we need further tightening of policy to control inflation. Despite the cumulative 190 bps hike since May this year, it is encouraging to see the central bank estimating the growth rate at 7% for FY23. Going forward we expect a few more rate hikes by the RBI before a long pause on rates. India will be among the high-growth economies with the least depreciated policy against the USD. However, a spike in crude prices and geo-political tensions may play spoilsport."
Nish Bhatt, Founder & CEO, Millwood Kane International
On liquidity, the RBI continued to re-iterate that it would conduct fine tuning operations to manage liquidity conditions. The central bank could gradually move towards maintaining liquidity conditions that are consistent with the operating rate becoming the repo rate, implying further upside for short-term rates in the economy. On the rupee, the RBI emphasized that their strategy would be focussed on maintaining investor confidence and anchoring expectations and that their FX reserves remained comfortable, signalling that FX interventions are likely to continue and be focused towards defending any extreme volatility in the rupee.
~ Sakshi Gupta, Principal Economist, HDFC Bank
The RBI raised the policy rate by 50bps to 5.9% as expected, aligning itself to aggressive monetary tightening globally. Moreover, the rate move was in response to continued domestic inflationary risks and growth that broadly continues to hold up. The central bank kept its inflation forecast unchanged at 6.7% in FY23 while lowering its GDP growth forecast by 20bps to 7% -- the latter in response to the lower-than-expected Q1 GDP numbers. The RBI kept its stance unchanged at “withdrawal of accommodation” justifying it by the fact that liquidity remains in surplus, and the policy rate trails behind the inflation rate. The central bank drew a comparison with 2019 when the stance was last neutral, and liquidity was in a deficit mode while the policy rate was higher than inflation – indirectly alluding to real positive rates in the economy.
~Sakshi Gupta, Principal Economist, HDFC Bank
Tight liquidity conditions along with the repo rate hike would lead to a significant rise in the cost of funding, impacting home loan rates as well. Going by the current trends we expect about 50% of this will be passed onto the home loan borrowers. A rise in home loan rates will further impact affordability across the markets. As per Knight Frank affordability index will deteriorate by another 2% This might slowdown home buying decision for a short to medium term. However, we hope, India’s steady economic growth and revival in consumer’s sentiment towards the economy will bring back confidence amongst the end users and support their home buying activities.
~ Shishir Baijal, Chairman & Managing Director, Knight Frank India
"The RBI stays committed to control inflation and bring it closer to the comfort level of 4% by continuing to increase the repo rate and tightening the liquidity condition. Although, global crude and commodity prices have softened a bit, revival in domestic demand along with sharp rupee depreciation would continue to exert price pressures leaving no choice for the RBI but to raise Repo Rate by another 50 bps taking the total rate hike since May 2022 to 190 bps. While this is expected in line with the global trend, it will have its impact on the sentiments across all buying categories, especially in the wake of the current festive season."
~Shishir Baijal, Chairman & Managing Director, Knight Frank India
“Maintaining vigil on global macro developments while recognising domestic strengths and vulnerabilities, RBI increased policy rates by 50 bps, largely in line with market expectations. Pausing short of igniting any terminal rate expectations, RBI committed to data dependence for policy moves. I believe it is a very balanced policy and calmed market nerves, which had become edgy post recent fed actions and financial market volatility. As far as rate trajectory goes, I believe RBI would not want to let the interest rate guard down as it makes our currency vulnerable. Hence, as of now, we see repo rate going to 6.40%-6.65% range in next couple of policy meetings. Interest rates are largely expected to remain range bound for now.”
~Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Mutual Fund
“RBI has lowered its GDP growth forecast to 7 % and CPI inflation has been maintained at 6.7 % for the current financial year. 67 % of the fall in forex reserves by 100 billion USD is due to revaluation effect. MPC maintains it stance of withdrawal of liquidity from the system. RBI refuses to state what could be the terminal repo rates and remain date dependent. Overall, the monetary policy is not as hawkish as market expected. Global adverse development has been acknowledged but RBI monetary policy stance is pre dominantly domestic driven. Rates market should take this positively and should trade in a range”.
~Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
"The MPC unanimously voted to raise the repo rate by 50 bps to 5.4% while remaining focused on withdrawal of accommodation. The RBI has chosen to again front-load the rate hikes to tackle the elevated inflation levels which would remain above upper tolerance level of 6% till atleast Q3FY23. Move of a hike of 50bps highlights the urgency to move closer to the neutral policy rate especially when the external environment remains uncertain. Recent depreciation in rupee coupled with elevated crude oil prices (though now on falling trend); might have weighed on members’ decision in favour of larger rate hike, addressing external sector imbalance and reducing the interest rate differential. Even though inflation seems to have reached its peak, it still warrants caution given the uncertain global environment. Inflation projection of 5% for Q1FY24 by RBI provides some comfort indicating modest pace of rate hikes going forward. Bond yields and equity markets may not get much impacted by the announcement and will get driven by changes in global risk appetite and direction of global flows."
~Dhiraj Relli, MD & CEO, HDFC Securities
"Prolonged inflation is a worry, it feeds into expectations, which means people expect the inflation trend to continue and expect prices to remain high in the future as well and change their behaviour accordingly. Should the consumer decide to postpone spending, it will reverse the nascent consumer spending recovery that India has been witnessing lately. Besides, producers raise the prices of goods assuming that the higher production costs will persist. The RBI’s move is thus prudent to contain inflation expectations and prevent adaptive expectations from impacting demand and preventing the spiraling of prices. Moreover, as policy rates reaches a normalized rate, the RBI will have a lesser aggressive job to do next year."
~Rumki Majumdar, Economist, Deloitte India
"The Runaway inflation prompted actions from the RBI. RBI’s move is justified in tightening the policy rates as it helps in anchoring inflation expectations when inflation has remained persistently high for a very long time (over two years now). In our upcoming forecast outlook, we expect inflation to remain high even though supply-side constraints will likely ease. This is because we are optimistic about demand and expect strong consumer spending to exceed supply, therefore leading to demand-pull inflation. That said, we expect our inflation to peak earlier than our previous estimates due to proactive actions by the RBI."
~Rumki Majumdar, Economist, Deloitte India
"In order to tame sticky inflation and cope up with the current global volatile economic scenario, the increase in the Repo rate by 50 basis points by the RBI is on expected lines. However, the stance has been maintained, indicating the intent of RBI to support growth in the mid-term tenure. The global unsettled environment and aggressive monetary policy tightening by the developed economies will impact our growth prospects which has forced RBI to a downward revision in the projected GDP growth rate to 7%, despite improvement in domestic aggregate demand and supply."
"With stabilizing commodity prices, reasonable kharif /rabi prospects and the current action taken by RBI, prices are expected to be under control in the coming quarters. On the international front,RBI's assurance to continue its judicious intervention to ensure stability in the foreign exchange market is a welcome sign to curb uncertainties and support long term revival and resilience of the economy. The overall indicators and today's policy action indicates that India is better placed to handle future economic challenges, while the world is on verge of a possible recession."
Jyoti Prakash Gadia, Managing Director, Resurgent India
"RBI hiked the policy rate by 50 bps along expected lines and also maintained its stance as “withdrawal of accommodation” citing that the real policy rate (adjusted for inflation) is still trailing pre-pandemic levels. GDP growth estimate for FY23 has been revised down marginally from 7.2% to 7%, while inflation forecasts have broadly been maintained. This indicates that the central bank is somewhat comfortable with macro-economic situation in India relative to other peer emerging economies. Therefore, we feel that the RBI may be nearing the end of the rate hike cycle in India and future rate hikes will have more to do with supporting the Indian currency and also to some extent the inflation trajectory. Both equity and bond markets have taken this in a positive stride and have rallied post the policy announcement."
Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance
“50 bps repo rate hike delivered was in line with expectation. Growth forecast was lowered marginally and CPI forecasts unchanged, which is what we had estimated. Key concerns seem to emanating from global factors and to a lesser extent domestic events. The RBI also is mindful of the currency movements given USD strength. 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”
~Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company
"Given that the global environment remains challenging with financial conditions tightening and fears of recession mounting, RBI stated that all segments of the financial markets are in turmoil globally and emerging market economies are also confronted with challenges of slowing growth, higher food and energy prices, spillovers from advanced economy policies, debt distress and sharp currency depreciation. Against this, the RBI has lowered the FY23 real GDP growth target to 7% versus 7.2% earlier even as domestic economic activity remains stable with resilient agriculture sector and strong credit demand. Moreover, despite the recent correction in commodity prices, CPI inflation target for FY23 has been kept unchanged at 6.7% on upside risks to food prices. The inflation forecast assumes Brent crude at $100/bbl in the 2HFY23. On the liquidity front, excess liquidity has moderated with LAF moving to deficit. The RBI has also decided to conduct only 14 day VRRR auctions from now on (merge 28 day VRRR with 14 day auctions). The RBI stated that intervention in FX market have been undertaken judiciously to curb volatility. Overall, the policy was largely in line and macro-economic stability remains the key focus area."
Poonam Tandon, CIO, IndiaFirst Life Insurance Company.
"With core inflation continuing to hover well above the upper tolerance limit, the RBI increased the repo rate by 50 bps, broadly in line with market expectations. Repo rates reverted to pre-pandemic levels, the highest since August 2019. The MPC maintained its stance on calibrated withdrawal of accommodation while supporting growth. We have seen system liquidity tighten since RBI started withdrawing excess liquidity, and system credit growth improved to 14%. With credit growth looking up, we believe the banks with a higher share of floating rates and a robust CASA-led deposit franchise should be placed well in this increasing interest rate environment. While the domestic inflationary pressures seem to be easing out gradually, the geopolitical tensions, volatility in global financial markets, and emerging risk of the global recession continue to remain key risks. Thus, the RBI has retained its inflation estimates for FY23, mildly tweaking Q2 and Q3 estimates, expecting relief only from Q4 onwards. It has also retained its growth estimates at 7.2% for FY23."
Naveen Kulkarni , Chief Investment Officer, Axis Securities
RBI Guv says expecting inflation to come down close to the target of 4% over a two year period
"If you see the legal provisions under the RBI Act, the MPC has to have a meeting to discuss the RBI's letter to the government. We are expecting inflation to come down close to the target over a two-year cycle. That was our expectation earlier and even now. But there are so many uncertainties coming in from time to time" said Das
"Stress on global financial system high on policy tightening, says Governor Shaktikanta Das
RBI Governor Shaktikanta Das said that domestic inflation and growth to guide MPC decisions
Aggressive monetary policy action is the 3rd shock to the world after COVID, and Russia-Ukraine war
MPC decisions to continue to be guided by domestic inflation and growth. Currency market volatility not a guiding factor
The RBI’s MPC raised its policy repo rate by 50bp to 5.9% as we were expecting. We expect a further increase of 25bp at the December MPC meeting, by which time CPI inflation will likely moderate to 6% YoY as the strong kharip crop is harvested. Once real interest rates are positive, the MPC can pause its rate hikes. The RBI too believes that CPI inflation will average 6%YoY in H2FY23. All central banks (with the exception of China’s) are prioritising the fight against inflation. The US, Eurozone and UK currently have much higher inflation rates than their targeted levels of inflation. India is only marginally higher than its targeted inflation rate, but has stayed persistently above it for half a year, hence the need to persist with rate hikes. The current account deficit widened to 2.8% of GDP in Q1FY23, but India’s external debt declined US$617bn (19.4% of GDP) in June 2022. We expect the BoP current account deficit to widen to 3.3% of GDP in Q2FY23, but to then moderate to 1.6% of GDP in H2FY23 as crude oil prices recede.
Prasenjit Basu – Chief Economist, ICICI Securities
"On the growth front, RBI appears to be fairly confident on the resilience of the domestic economy despite the global headwinds. While the GDP forecast for FY23 has been slightly moderated to 7.0%, there is a comfort emerging from the recovery in private consumption and the improved performance of the monsoon. This will help the central bank to continue on its hawkish stance till inflation declines below 6.0%. As regards headline inflation, MPC has maintained the existing forecast of 6.7% given the upside risks on food inflation and the likely rigidity of core inflation given the increasing consumption demand. The possibility of an additional hike in Q3FY23 is also borne out of RBI’s expectation that inflation will not come down in a hurry, given that they have projected an average CPI print of 6.5% in the next quarter, well above the upper MPC band."
- Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research
“On expected lines, RBI MPC has raised the repo rate for the fourth time in the current fiscal, taking the aggregate hike to 190 bps. Importantly, the central bank has continued to be in the “withdrawal of accommodation” mode, reflecting the increased possibility of a further rate hike in the Dec’22 of MPC. Clearly, the key concern at the current juncture is the persistent and the sharp monetary tightening by the major central banks which the governor referred to as the “next storm” after the pandemic and the war in Ukraine. Therefore, the likelihood of a terminal or neutral rate of 6.5% and even above over the next 2 quarters has clearly increased."
~Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research