250 bps repo rate hike in FY23! Is RBI set to declare rate hike innings in next financial year?

The Reserve Bank of India (RBI) on Wednesday hiked repo rate for the sixth consecutive time in the ongoing financial year by 25 basis points to 6.50 per cent. The central bank stood focused on its stance of withdrawal of accommodation to ensure inflation remains within target going forward, while supporting growth. With this hike, RBI has raised interest rates by 250 basis points since May 2022. In general, financial markets gave thumbs up to Wednesday’s rate hike as indicated by over 400 points rally in the benchmark BSE Sensex in the morning trade.

As in cricket test matches, the key question is whether the RBI is now set to declare the innings on its rate hike cycle in FY24. The next meeting of the MPC is scheduled during April 3, 5 and 6, 2023. Market watchers hold mixed views on the forthcoming monetary policy outcome. Here’s what market watchers and economists have to say.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers

 We felt the possibility of a rate pause this time around was at least 50 per cent. On the inflation front, the major softening in India post April 2022 was there main reason for us to expect a standstill in this policy. On the contrary, the Reserve Bank of India seems to have been more bothered about the high and sticky core inflation for more than a year. More importantly, the continued rate hikes by the Bank of England, the ECB, and the US Federal Reserves and the implications of these in the foreign exchange market influenced the decision of the RBI to go for another rate hike. Unless there is an unexpected flare in inflation, we would expect the central bank to maintain unchanged policy rate for the remainder of 2023. This would be positive both for the debt and equity markets.

Aurodeep Nandi, India Economist and Vice President, Nomura

The current rate hike of 25bp was in line with our expectations, although we believe that the time is ripe for a change of stance to ‘neutral’ from ‘withdrawal of accommodation’. As such, the RBI governor’s communication struck a somewhat hawkish note, flagging concerns on high core inflation, projecting headline inflation at 5.3 per cent for FY24, projecting confidence on growth, and flagging that monetary policy conditions are still not as tight as pre-pandemic levels – which doesn’t bolt the door completely on further tightening. While this is appropriate posturing at a time of elevated global risks, we believe the policy arithmetic has changed from ‘de-facto’ policy tightening, to a distinctly data dependent mode. In our view both, growth and inflation could turn out to be below the RBI’s expectations and our baseline view is a pause hereon.

Sandeep Yadav, Head-Fixed Income, DSP Mutual Fund

RBI has given a strong growth forecast for next FY24 at 6.4 per cent-which beats the street forecast. Similarly, RBI expects inflation at 5.3 per cent in FY24. From both these forecasts, it seems clear that RBI may entertain more rate hikes going forward. RBI’s commentary is quite similar to the US Fed commentary–sticky inflation and growth. Like US Fed, RBI too is not signalling any pause. We believe that another rate hike is a strong possibility – and domestic policy is still intertwined with the global central banks’ policies. We do not think the policy changes anything materially for bond yields.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

The rate hike of 25 basis points came on expected lines. The split mandate of 4-2 was also as expected. The stance too was unchanged which is in line with the excess liquidity continuing to be tightened. We see the RBI remaining concerned on inflation, especially core inflation. We expect inflation to average around 5.2 per cent in FY2024 with adverse risks to growth likely to increase. The RBI will likely become increasingly data dependant and look at the impact of the past rate hikes on inflation-growth dynamics. We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April.

Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund

The policy action and guidance are along expected lines as the rapidly evolving external dynamics and the still elevated core inflation was expected to constrain any possibility of a specific forward guidance. We expect that this hike would be last in this cycle with incremental actions to modulate excess liquidity. The lag effect of earlier actions and the cumulative monetary and liquidity tightening should enable policy rates to stay on hold incrementally. The FY24 GDP estimates which are in alignment with the Budget numbers probably remains on the higher side that could be re assessed as we move forward.

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