Will 90 bps hike in repo rates in 2 MPC meetings help tame 95-month high inflation?

High inflation coupled with aggressive rate hike plans by the US Federal Reserve, strengthening of the US dollar and outflow by foreign institutional investors (FIIs) from emerging market economies, including India, has pushed the Reserve Bank of India (RBI) on Wednesday to hike the repo rate by 50 basis points (bps) to 4.90 per cent. In a surprise move, the central bank had upped the rate by 40 bps in May. 

Market watchers believe that the major part of the rate hike by the central bank was already factored in by the financial markets. However, they further see up to 160 basis points hike in repo rate to tame inflation in the coming months. The retail inflation rate soared to a 95-month high in April at 7.8 per cent. The benchmark BSE Sensex traded nearly 60 points higher at 55,166 at around 11.15 am (IST). Here’s what market experts have to say:

Aditi Nayar, chief economist, ICRA

"While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 per cent 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. However, the upmarch in the yields will now be somewhat shallower than our earlier expectations."

Saransh Trehan, managing director, Trehan Group

"RBI's decision to increase the policy rates by 50 basis points is not a surprise, in fact, we expect a few more hikes to put check on inflation. The hike in policy rates will result in increasing the cost of borrowings and it may hit the cost of construction by 5 per cent to 7 per cent. We don’t expect a big impact on housing demand as of now."

Sujan Hajra, chief economist and executive director, Anand Rathi Shares & Stock Brokers

"At the peak, we expect the RBI to take the repo rate to the 6-6.5 per cent range during the ongoing rate hike cycle."

Sandeep Bagla, CEO, Trust Mutual Fund

"Markets expect regulators to have better information and hence act proactively to maintain macro stability and equilibrium. Regulators need to prioritise their target variable between growth and inflation. In India, we have raging inflation at 7.8 per cent, higher capacity utilisation, and growing consumer confidence, and yet the policy rate has been hiked to 4.90 per cent only, which is lower than pre-pandemic levels. The ideal effective overnight rate should be closer to 6 per cent, but at this pace, it might take us 3-4 policies more to reach there. Monetary policies tend to work with significant lags on the real economy. The longer we wait in raising rates adequately, the more we are letting the underlying inflationary fires simmer. We don't expect inflationary expectations to come down and most likely the 10-year G-sec yield would trade between 8.25-8.50 per cent in the next couple of quarters."

Rajiv Shastri, director, and CEO, NJ AMC

"The MPC's actions are in line with the minutes of their previous meeting and indications thereafter. Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers. Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term. However, there are some indications that global prices may moderate soon which may allow for a pause sooner rather than later."

Manish Lunia, co-founder, Flexiloans.com

"The overall increase of around 1 per cent in the cost of funds by the RBI over the last few months will impact the overall feasibility of large projects, infrastructure and long gestation projects. MSMEs, on the other hand, are recovering due to improved customer sentiment after nearly two years of uncertainty. MSMEs need more adequacy and certainty of funds versus costs alone and thus we believe they should be able to handle this increase, as long as this stays in this range for the medium term.

The increase in NACH mandate limits per transaction to Rs 15,000 from Rs 5,000 will expand quick access to credit to the customers. The silver lining is the calibration that RBI continues to hint for its monetary policy action in future - evenly balanced towards growth and fiscal stability measures."

Suvodeep Rakshit, senior economist, Kotak Institutional Equities

"The tone of the policy continues to be hawkish and we expect the RBI to continue hiking the repo rate to ensure a neutral to the marginally positive real policy rate. We expect a 35 bps repo rate hike in the August policy to 5.25 per cent and repo rate at 5.75 per cent by end-FY2023. Along with pushing the repo rate above the pre-pandemic level, a 35 bps hike would also signal a gradual normalisation in the policy actions while being adequately hawkish. We also expect another 50 basis points hike in CRR to 5 per cent by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels."

Sharad Mittal, director and CEO, Motilal Oswal Real Estate Funds

"Decadal low mortgage rates coupled with other government-driven incentives and increased value of homeownership during the pandemic provided much-needed stability and momentum to the real estate sector. The robust uptake in the demand has continued despite recent inflationary pressures on commodity prices and adverse supply chain constraints. RBI in its last two MPC meetings has hiked interest rates to keep the rising inflation under check. Now with mortgage loan rates set to go up, we may notice a slight demand blip in the short term but the overall outlook on the sector remains strongly bullish in the long term. In an interesting move, RBI has now allowed rural cooperative banks to lend towards residential housing projects. This will help improve much-needed liquidity in the sector."

Shivam Bajaj, founder and CEO, Avener Capital

"In an attempt to curb inflation, the expectations of this rate hike had been factored in the form of an increase in bond yields, which might result in expensive borrowing for corporates. However, a consequent correction expected at raw material prices as a result of this announcement might provide a stable long term growth plan for the overall economy."

VK Vijayakumar, chief investment strategist, Geojit Financial Services

"RBI's projections of a GDP growth rate of 7.2 per cent and inflation of 6.7 per cent for FY23 reflect a realistic monetary policy. The higher inflation projection indicates that the central bank recognises the seriousness of inflation and the 50 basis points repo rate hike is a message that they are determined to anchor inflation expectations. The governor's remark that “the economy remains resilient and recovery has gathered momentum" is bullish from the market perspective. The bond market's positive response with bond yields rising stems from the absence of CRR hike."

Shravan Shetty, MD, Primus Partners

"RBI has revised the inflation expectation to 6.7 per cent, indicating that there will be further rate hikes to help reduce inflation expectations. We expect another 50-75 basis points before RBI can look at a pause. RBI has also allowed the use of credit cards on UPI platforms. This is a significant move opening up UPI infrastructure to small loans. This could increase competition for BNPL products with credit card players looking to increase loan wallet share by bringing in new products."

Sumant Sinha, President ASSOCHAM

"The central bank’s decision of raising policy interest rates by 50 bps, along with the recently announced fiscal measures by the government such as reduction in excise duty on petrol and diesel, will enable India to tackle inflation in the medium term in the face of significant global headwinds. The tamping down of inflation is critical to sustain the economy’s robust growth momentum. The RBI will need to work closely with the government and other stakeholders to ensure the recent rate hikes within a short time frame do not impact the rate of GDP growth, especially given continued global challenges including high energy and food costs. It is understandable  that there is concern about the rake hikes resulting in higher EMIs but, in the longer run, the resulting price stability will play a crucial role in supporting rising demand. All in all, the RBI’s move is necessary and well-reasoned,  given the current macro-economic currents."

Also Read: RBI MPC hikes key interest rate by 50 bps to 4.9%; retail inflation forecast at 6.7% for FY23

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