RBI Monetary Policy Meet: Repo rate raised to 6.25 per cent

Shaktikanta Das

The Reserve Bank of India (RBI) raised the benchmark repo rate by 35 basis points to 6.25 per cent on Wednesday, for the fifth time in a row. The benchmark interest rate has been raised by a total of 190 basis points, with three increases of 50 basis points since June and one increase of 40 basis points during an off-cycle meeting in May. After inflation remained above the central bank’s tolerance band, the rate was raised.

Governor Shaktikanta Das, who delivered the Monetary Policy Committee (MPC) remarks, also stated that the FY23 real GDP forecast had been reduced to 6.8 per cent, 0.1 per cent lower than updated World Bank estimates announced Tuesday. Furthermore, the RBI has maintained its FY23 consumer price index (CPI) inflation projection at 6.7 per cent, and Das expects prices to decline when the winter harvest arrives.

“Will look for durable signs for turn in liquidity cycle for infusing liquidity. BI remains nimble and flexible in its liquidity management operations. So, even though the RBI is in absorption mode, we are ready to conduct LAF operation that inject liquidity as may be needed. We will look for a durable sign of a turn in the liquidity cycle. Market participants must wean themselves away from overhang of liquidity surpluses,” says RBI Governor Das.

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company, stated that, “The RBI has given a “Main Hoon Na” (we are there ) policy, reassuring the market. In a world where central banks are fighting to regain credibility, the RBI stands tall managing conflicting objectives of growth and inflation admirably. A data-driven RBI will keep on playing balls on merit and continue to keep the growth score board moving with inflation under check.”

Madhavi Arora, Lead Economist, Emkay Global Financial Services on RBI MPC, stated on the rise, “The MPC expectedly delivered a 35bps hike with 5-1 vote and kept stance unchanged at “withdrawal of accommodation”. The tone was still cautious and data dependent, and with the governor emphasizing the need to calibrate the policy. The governor again highlighted the stickiness of core inflation the risk that sustained high inflation could unmoor inflation expectations and lead to second-round effects in the medium term.

We note that while the governor justified INR’s resilience on net, a relatively dovish tone would not have augur well for INR which has seen sharp correction vs peers in last couple of days. This has been on account of already low forward premia in FX, and signalling of a pause would have further pressured the FX fwd premia on the downside, making carry trades less attractive for FPIs, implying fears of unwinding of these trades, ceteris paribus.

A 35bps hike today implies the ex-post real rates still sub 1 per cent — RBI’s estimated real neutral rate, keeping 6-month ahead inflation as an anchor (a more certain trajectory vs one-year ahead), which may imply more space for another shallow hike of up to 25bps to reach a neutral rate (albeit not necessarily implying end of cycle) . At this point, we still think that the RBI would not turn too restrictive however, the extent of global disruption will remain key. We are closely watching the global pace of inflation deceleration and how the impending recession will shape DM central bank policies, which could influence the RBI’s reaction function. The still-fluid global situation might require frequent adjustments in macro and policy assessments ahead as far as terminal rates are concerned.”

Shiv Parekh, Founder hBits, shared his views on RBI Monetary Policy, stating, “The commercial real estate growth is pulling lots of investment, it has been stable through all ups and downs. Even the current repo rate hike will not affect much on commercial real estate, as the current increase is in line with the RBI’s mission to take on inflation. As there has been a moderate hike in the home loan too, the affordability in the home loan is still fine from a residential perspective. We expect that the positive sentiment will remain in the CRE sector. When it comes to fractional ownership, it is one of the best investments at this time which gives steady and stable returns.

However, the real estate industry expects a reduction in the key rates going forward, which will be widely celebrated, as lowering interest rates has been a crucial factor in the revival of the demand in overall real estate. It will help in improving the liquidity situation which is vital for the sector.”

Abheek Barua, Chief Economist, and Executive Vice President, HDFC Bank, comments on RBI Monetary Policy, stating, “The RBI policy announcement today was in line with expectations in terms of raising the policy rate by 35bps and keeping the policy stance unchanged. However, the policy tone was distinctly more hawkish than expected. When a central bank combines its sanguine view on growth with continued concerns about inflation – particularly the persistence in core inflation – it suggests that it is prepared to continue its fight against inflation and has the space and willingness to raise rates further. The central bank emphasized that it is not ready to let up its inflation battle and aims to bring down inflation below 6 per cent in the near term and then closer to 4 per cent over the medium term.

There were other signs in the governor’s statement that suggested that tightness in financial conditions could intensify going forward. While the RBI continued to re-iterate that it would continue to manage liquidity conditions through fine tuning operations, it cautioned markets to wean themselves off the surplus liquidity overhang and not take it for granted.

Today’s policy announcement does provide soft support for the rupee ahead of the Fed meeting next week and can be viewed perhaps as an attempt by the RBI to continue aligning itself with the still hawkish G7 central banks. Furthermore, the RBI’s continued emphasis on the factors that lend support to the rupee, signals its preference for a stable rupee going forward implying intervention on both sides of the market to keep it range bound into 2023.

In terms of forecasts, GDP growth was revised down marginally by 20bps to 6.8 per cent for FY23, although the central bank showed comfort around the current growth momentum. On inflation, the full-year figures were kept unchanged at 6.7 per cent. The bottom line is the policy announcement today signalled that more rate hikes are in the offing. We expect the terminal rate to be close to 6.5-6.75 per cent.”

Umesh Kumar Mehta CIO, Samco Mutual Fund, stated that, “RBI has proved that it has indeed managed the global turbulences very astutely, by proactively first, increasing the policy rates aggressively to control inflation and manage currency outflows and then now quickly turning to neutral stance ahead of developed world, by rightly foreseeing the turn of inflation cycle and loosening of monetary strings about to come from the world’s biggest monetary powerhouse, the US. Indian coffers have turned the tide quickly, in a matter of weeks the currency reserves have increased by around 8 to 9 per cent and it seems the current hike in REPO rate by 35 BPS to 6.25 per cent seems to be nearing an end which was subtly indicated and rightly so as India firmly stands out as one of the most resilient economies of the world. RBI has steered the Indian monetary ecosystem exceedingly well compared to any other monetary authorities in the world.”

The RBI governor praised India’s economy’s performance in the midst of global problems such as the Ukraine crisis and the Covid-19 outbreak, emphasising that it is the fastest growing in Asia this year.

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