Just seven days after budget announcement, RBI hikes repo rates to 6.5%

Industry stakeholders say that the hike is under their expected range even after hike of 225 bps to contain inflation.

RBI hikes repo rates

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to raise the key benchmark interest rate by 25 basis points to 6.5 per cent on Wednesday. Four out of six members of MPC have decided to go ahead with this hike in the repo rate, RBI Governor Shaktikanta Das said.

MPC meeting started its three-day meeting on February 6 amid the rate hiking spree that started in May last year to check inflation.

With retail inflation showing signs of moderation and remaining below RBI’s 6 per cent upper tolerance level, and a projected slowdown in gross domestic product (GDP) growth in the next fiscal starting April, experts are of the opinion that the central bank may only opt for a 25 basis points hike in the key interest rate.

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Reacting to the big breaking, here’s what industry stakeholders have to say, as they already had instincts of the hike.

“On expected lines, the RBI has gone in for a smaller dose of a repo rate increase by 25 basis points taking into account the moderation of inflation but a continued vigil is required on core inflation, says Jyoti Prakash Gadia, Managing Director at Resurgent India.

He further adds, “The overall stance has been maintained and not yet shifted to neutral indicating the approach RBI to take calibrated steps to Meet the challenges of the growth vs inflation matrix. The persisting uncertainties and volatile global scenario have prompted the RBI to revise downward the next year’s GDP growth rate to 6.4% which is however still well comparable with peers.”

Talking about the impact of the hike on the stock market and the banking sector, Gadia says, “The stock market is expected to respond positively to the measures announced by RBI, with the underlying resilience of the economy being at the forefront. The banking sector is also expected to respond positively with healthy credit growth and a positive real rate of interest to the depositors.”

“Overall a pragmatic approach was adopted by RBI with the intent to have an immediate focus on inflation while supporting growth in the medium term,” he concluded.

The RBI has also announced measures to widen the government securities market by amending the mechanism of lending and borrowing of government securities which will also provide depth to the market and facilitate smoother government borrowings for the next financial year.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers shares, “The 25 basis points rate hike by the Reserve Bank of India today has been in line with the consensus expectations. We, however, felt the possibility of a rate pause this time around was at least 50 per cent.”

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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 RBI to go for another rate hike, he added.

Speaking of the further hike, Hajra expects “RBI to maintain an unchanged policy rate for the remainder of 2023. This would be positive both for the debt and equity markets.”

In its December monetary policy review, the central bank raised the key benchmark interest rate by 35 bps after delivering three back-to-back increases of 50 bps.

Since May last year, the RBI has increased the short-term lending rate by 225 bps to contain inflation, mostly driven by external factors, especially global supply chain disruption following the Russia-Ukraine war outbreak.

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