The Reserve Bank (RBI) has adopted an aggressive stance on inflation and may go in for more hikes in the benchmark interest rate in the coming months, say experts.
The central bank on Friday, 5 August, raised the key interest rate by 50 basis points, the third straight increase since May in an effort to cool stubbornly high inflation and defend the rupee.
The repurchase (repo) rate was raised by 50 basis points to lift the interest rate to the pre-pandemic level. The 5.40 percent repo rate was last seen in August 2019.
"The RBI has clearly taken an aggressive position on inflation even though there is no change in the forecasts on both inflation and growth. The confidence in growth gives it a strong justification for attacking inflation in a big way," said Madan Sabnavis, Chief Economist, Bank of Baroda. There may be another 50 bps hike during the year in this situation as inflation in the next two quarters will remain above 6 percent, he added.
The central bank sees annual retail inflation at 6.7 percent. It expects the consumer price index (CPI)-based inflation in the second quarter of current fiscal at 7.1 percent and at 6.4 percent in October-December.
'Textbook Policy Announcement'
HDFC Bank chief economist Abheek Barua said the RBI delivered a textbook policy announcement today – one that is frontloaded and aggressive in response to inflation that remains high while the growth momentum remains reasonably positive.
He too expects the RBI to continue with its rate hike in the upcoming policies taking interest rate up to 5.75 percent by the end of the year.
"The bond market rally seen over the last few days is likely to reverse and we expect the 10-year paper to trade closer to 7.3-7.4 percent by the end of the quarter as markets reprice in RBI action and the supply of both SDLs (state development loans) and central government bonds this year," Barua opined.
'Forward Guidance Would Have Mattered More Than Rate Action'
Rajni Thakur, Chief Economist at RBL Bank, said the markets had broadly priced in 50 bps hikes in repo rate and any forward guidance would have mattered more than the rate action itself.
She too was of the view that given the growth-inflation outlook, further hikes towards 6 percent terminal repo rate seem imminent, even though the pace of hike is likely to be softer going ahead.
"Continued ‘focus on withdrawal' indicates further drawdown of excess liquidity as well, in which case, monetary tightening is far from over yet," Thakur said.
RBI Governor Shaktikanta Das while announcing the credit policy said monetary policy should persevere further in its stance of withdrawal of accommodation to ensure that inflation moves close to the target of 4 percent over the medium term, while supporting growth.
Dhruv Agarwala, Group CEO, Housing.com said the new repo rate will ultimately impact the cost of borrowing for India's homebuyers.
However, it is also pertinent to note that past rate hikes and the consequent increase in home loan rates have so far not had any discernible negative impact on the burgeoning demand for homes, he said.
"We believe that positive buyer sentiment coupled with renewed interest of investors in residential real estate will cushion some of the adverse impact of the rate hike," he added.
Das also did not offer any indication of a change in the stance or a possible pause in the next policy due in late September.
'Could See a Downward Trend in Borrowing of Home Loans'
V Swaminathan, Executive Chairman, Andromeda loans and Apnapaisa said the lending rate calibration by the RBI could signal a downward trend in borrowers looking for home loans, as both new and existing home loan EMIs are set to go up, ushering in a wait-and-watch attitude among new homebuyers.
CEO of Trust Mutual Fund, Sandeep Bagla, said there are strong and stubborn inflationary impulses in form of commodity prices and wage pressures, which will go away with time and aggressive hikes.
Rate hikes could be spread out such that there is minimal impact on debt funds' performance, Bagla said.
Rohit Arora, CEO & Co-Founder, Biz2Credit & Biz2X said the policy announcement is on expected terms, demonstrating the RBI's ongoing commitment to maintaining a balance between stability and growth.
Although with this action, the easy money era will come to an end and conditions will return to what they were before COVID-19, he added.
Sampath Reddy, CIO, Bajaj Allianz Life Insurance, said RBI policy was hawkish and the MPC delivered a frontloaded 50 bps rate hike compared to market expectations of 35-40 bps.
"With the hawkish policy today, bond yields have hardened and we expect them to remain elevated in the near term. RBI's future course of action will continue to be data dependent and influenced by global factors," he said.
Suman Bannerjee, CIO, Hedonova said there is a lot of excess liquidity in the system that needs to be flushed out.
"Inflation is currently at 7.1 percent while the RBI's target has always been sub-6 per cent, I see additional measures coming up in the next few months," Bannerjee said.
The next meeting of the Reserve Bank of India's rate setting panel – Monetary Policy Committee – is scheduled for 28-30 September, 2022.
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