Image: Reuters Berita 24 English - In an effort to reduce chronically high inflation in Asia's third-largest economy, the Reserve Bank ...
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| Image: Reuters |
Berita 24 English - In an effort to reduce chronically high inflation in Asia's third-largest economy, the Reserve Bank of India hiked its key interest rate by 50 basis points on Wednesday, as largely predicted, the second boost in as many months.
The central bank also ditched the long-held term that future policy would remain 'accommodative,' reinforcing predictions of more rate hikes and other measures of tightening in the months ahead as battling inflation becomes its primary emphasis.
After the policy decision, RBI Governor Shaktikanta Das noted, "Side risks to inflation that were flagged in previous policy meetings have materialized earlier than expected."
The MPC increased the key lending rate, also known as the repo rate, by 50 basis points (bps) to 4.90 percent. The rates for the Standing Deposit Facility and the Marginal Standing Facility were both raised by the same amount, to 4.65 percent and 5.15 percent, respectively.
COMMENTARY
BARCLAYS, MUMBAI, RAHUL BAJORIA, MD AND CHIEF INDIA ECONOMIST
"The RBI raised its inflation forecasts while maintaining its growth forecasts. This indicates a desire to revert to the pre-COVID-19 policy stance as soon as possible, while keeping inflation at the forefront of its decision-making. From 5.15 percent, we now predict the policy rate to reach 5.75 percent by December "rcently before."
"Based on today's actions, we believe the RBI will continue on its rate hike path, raising the policy rate to 5.25 percent by delivering a 35 basis point raise at its next meeting in August if the inflation outlook does not change and downside growth risks do not considerably increase. Inflationary pressures have become more entrenched, according to the central bank, which has happened far faster than expected."
"Because today's policy outcome was roughly in line with expectations, we believe it sends a very strong signal that the central bank no longer feels compelled to deliver rate hikes above market expectations."
HDFC BANK, GURUGRAM, CHIEF ECONOMIST ABHEEK BARUA
"The Fed's monetary policy pronouncement today was bold, going beyond just 'front-loading' interest rate hikes. The central bank appeared to be significantly more concerned about inflation — as seen by a 100-basis-point increase in its inflation prediction to 6.7 percent — and relatively less concerned about domestic growth i.e "pulsations"
"The RBI is clearly concerned about the broad-based nature of inflation and the possibility of a second-round effect on inflation expectations. As a result, the policy rate is anticipated to be raised considerably above pre-pandemic levels, approaching 6% by fiscal year's end ""It's over."
"Bond rates initially rallied after the policy announcement, as the rate hike had been widely priced in and the threat of a higher rate hike or a CRR hike had passed. With high oil prices and rising global yields, however, this recovery is likely to be short-lived, and yields may continue to rise."
L&T FINANCIAL HOLDINGS, MUMBAI, RUPA REGE NITSURE, GROUP CHIEF ECONOMIST
"Given that they have boosted their inflation prediction for FY23 by 100 basis points, the RBI hiking the repo rate by 50 basis points is logical. However, it's unclear why they didn't take today's policy decision into account when forecasting inflation. Given the velocity of global price rises, it seems evident that the RBI will front-load interest rate hikes in the coming policy reviews."
SUJAN HAJRA, ANAND RATHI SHARES AND STOCK BROKERS, MUMBAI, IS THE CHIEF ECONOMIST AND EXECUTIVE DIRECTOR.
"The present steps are in line with the Reserve Bank of India's drastically revised inflation and unchanged growth predictions for the current fiscal year. In addition, the RBI's decision was impacted by persistently rising inflation, the US Federal Reserve's aggressive rate raise intentions, the strengthening of the US currency, and portfolio capital outflows from developing market economies, including India. The central bank is plainly front-loading monetary policy tightening in order to fast return the rate to pre-pandemic levels. Following that, the RBI is expected to scale back rate hikes to 25 basis point increments."
ECONOMIST, DBS BANK, SINGAPORE RADHIKA RAO
"The 50 basis point boost reinforced the centrality of price stability as a policy goal for preventing a hardening of adaptive inflationary expectations, as we expected. Front-loaded action will be critical in the face of indicators that price threats are widening and turning persistent. Despite the government's numerous alleviation efforts, the upward adjustment in the CPI projection is likely to raise the terminal policy rate in this cycle. The phrase "accommodative" was removed from the commentary, signaling a shift to a more neutral attitude with a hawkish tilt."
GARIMA KAPOOR, INSTITUTIONAL EQUITIES ECONOMIST, ELARA CAPITAL, MUMBAI
"With inflation likely to continue above the RBI's mandate through FY23, we expect the MPC to raise the policy repo rate by another 40 basis points this fiscal year, aiming for a terminal repo rate of 6.25 percent in the current rise cycle," says the report.
"Domestic liquidity tightening, rising crude oil prices, tighter global financial conditions, and the danger of the FY23 fiscal deficit being overshot are all likely to exert downward pressure on domestic bond yields. Over the next four to six years, we estimate the 10-year bond yield to steadily rise to 8% "a few months."
INDRANIL PAN, YES BANK, MUMBAI, CHIEF ECONOMIST
"The RBI has maintained its ambitious inflation prediction and may have factored in the worst-case scenario on inflation expectations for the time being. We expect the front-loading strategy will continue, therefore another 40 to 50 basis point hike in the repo rate is penciled in for the August policy."
"Following that, the RBI may have to be more forgiving in terms of the magnitude of rises, in accordance with the current inflation trajectory, which also points to a fourth-quarter result below 6%."
INDIA ECONOMIST KUNAL KUNDU, SOCIETE GENERALE, BENGALURU
"The central bank stayed true to its altered inflation-targeting strategy. Certainly, the central bank has a number of issues, including dramatically increased inflation, rising bond yields, and dismal growth forecasts. Despite understanding full well that monetary policy can scarcely solve immediate supply-side difficulties, the RBI made the correct decision to confront inflation. At this point, the RBI must hike rates sufficiently to create a growth slowdown in order to prevent high input costs from being passed on to output prices, as the long-term economic cost of unresolved inflation would be considerably more devastating. However, the RBI's predictions imply that inflation will only moderate slowly and will remain considerably above the RBI's 6.0 percent upward tolerance limit ""Recent."
KOTAK INSTITUTIONAL EQUITIES, MUMBAI, SUVODEEP RAKSHIT, SENIOR ECONOMIST
"The policy tone remains hawkish, and we expect the RBI to keep rising the repo rate in order to maintain a neutral to moderately positive real policy rate. We anticipate a 35 basis point raise in the August policy to 5.25 percent, with the repo rate reaching 5.75 percent by the end of FY2023. A 35 basis point raise would suggest a gradual normalization of policy actions while remaining sufficiently hawkish, in addition to raising the repo rate above the pre-pandemic level. We also predict another 50 basis point increase in the CRR to 5% by the end of FY2023, bringing liquidity conditions closer to pre-pandemic levels ""There are several thresholds."
INDIA ECONOMIST AND VICE PRESIDENT, NOMURA, MUMBAI AURODEEP NANDI
"The RBI's 50-basis-point boost today, on top of a 40-basis-point hike in May, reflects inflation pushing its way to the top of the priority list and the central bank's belated attempt to catch up with the curve. The RBI's higher revision of the inflation prediction for FY23 to 6.7 percent from 5.7 percent in April was also in line with our expectations, but still below our 7.2 percent forecast. As a result, we believe we are still a long way from the finish line and that more rate hikes will be implemented in the near future."
AXIS CAPITAL, MUMBAI, PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST
"The RBI has lifted the effective policy rate by 155 basis points this year, from 3.35 percent reverse repo to revised 4.90 percent repo rate, through a series of rate hikes and liquidity tightening measures. Given that CPI inflation is anticipated to average 5% to 5.5 percent in 1 year, we anticipate a peak repo rate of 6% in the current tightening cycle "in the next 12 to 18 months."
ICRA, GURUGRAM, CHIEF ECONOMIST ADITI NAYAR
"While more rate hikes are still on the table, with the reference to the revised repo rate of 4.9 percent staying below the pre-pandemic level, the comment on the government borrowing program's orderly completion has helped to calm the 10-year G-sec yield. In the next two policies, we expect further repo rises of 35 basis points and 25 basis points, respectively."
