RBI monetary policy: Experts weigh in on the first rate hike since January 2014, to 6.25 percent

The Reserve Bank of India on Wednesday raised its policy rate for the first time in over four years owing to inflation concerns, and it surprised some analysts by keeping its policy stance as “neutral”.

The central bank’s monetary policy committee lifted the repo rate by 25 basis points to 6.25 percent, the first increase since January 2014, as predicted by 46 percent of respondents in a Reuters poll this week. All six members on the rate panel voted for an increase.

The reverse repo rate was also raised by 25 basis points to 6.00 percent.

Before Wednesday, the last policy rate change was a 25 bps cut in August 2017.  On 28 January 2014, the repo rate was hiked by 25 bps to 8 percent.  For seven consecutive times the repo rate was cut by a cumulative two percent to 6 percent.

Shilan Shah, senior India economist, Capital Economics

The rationale behind the rate hike stems largely from the outlook for inflation. In particular, core inflation has surged to a four-year high and the central bank noted several upside risks, including stronger domestic demand and higher inflation expectations.

“At the same time, however, the central bank sounded upbeat on the growth outlook following the recent run of positive activity data. With growth strengthening and core inflation picking up, we think today’s hike marks the start of a modest tightening cycle.
Lakshmi Iyer, CIO (Debt) & Head – Products, Kotak Mutual Fund

The MPC voted unanimously for a rate hike, though maintaining the stance of the policy in neutral gear. The CPI ranges have been revised upward, which also suggests the key reasons, among others for rate hike. While the rate hike was a largely discounted event, the increase from 11% to 13% SLR for LCR purposes, comes a potential demand deterrent for gsecs. With no great triggers for yields to ease, we could expect long bond yields to remain at elevated levels. Short end may get respite to reduced LCR related issuances, so we could expect some easing at shorter end of the yield curve. Prudence demands to stay at short end of the yield curve and continue to favour accruals over duration.

Jimeet Modi, CEO & Founder at Samco Securities & StockNote 

RBI’s rate hike by 0.25 percent to 6.25 percent is guided not by domestic factors but because of global monetary tightening policies adopted by developed and developing countries alike. Not only US, but some of the Asian countries have also increased their interest rates. Had RBI not raised the interest rate, there could have been dollar exodus which is not in the interest of our Country where 80 percent of crude oil requirements are imported. Rate hike is therefore in a way to control inflation albeit indirectly. However since the growth projections are in the range of 7.5 percent to 7.6 percent, the rate hike seems to be intended to fend off international headwinds. Domestic inflation expectations are slightly revised upwards but are still not a cause of worry and that could be the reason why the policy stance of the RBI is neutral. Although there is a rate hike but there is nothing negative for the markets.

Sapan Gupta, National Practice Head - Banking & Finance, Shardul Amarchand Mangaldas

 This is a cautious approach. Monetary policy statement needs to consider the rural growth as well, which is not in line with urban growth. The corporate credit demand has yet not revived fully and increase in rate may further slow it down.

Hitesh Jain, AVP - Research, IIFL Wealth Management Ltd

With core inflation remaining stubborn and higher oil prices posing a risk, the Monetary Policy Committee unanimously hiked the repo rate by 25bps. However, the central bank persisted with the neutral stance, defying the prior expectations of a tilt towards a hawkish tone. Hardening of price pressure during April has prompted RBI to revise the CPI inflation for H1 FY19 to 4.8-4.9% from the earlier estimate of 4.7-5.1 percent. For H2, CPI is seen at 4.7 percent, up from the prior forecast of 4.4 percent. Upside risks to these projections were reiterated, including Oil, HRA revision by state governments and absence of clarity over the hike in Minimum Support prices for Agricultural produce.

With output gap narrowing, stable household consumption and revival in investment activity, GDP growth for FY19 is retained at 7.4 percent. Growth during H1FY19 is pegged at 7.5-7.6 percent, while H2 is seen expanding around 7.3-7.4 percent. A status quo on the neutral stance has given birth to the expectations that the central bank will go slow on the future rate hikes, possibly implying a pause on the rates till the end of this calendar year. The central bank will like to monitor developments on the monsoon, government’s fiscal adherence and the energy markets before taking a firm call on the interest rate trajectory.

Aditi Nayar, Vice President, prinicipal economist, ICRA, Gurugram

The pre-emptive rate hike being accompanied by the maintenance of a “neutral” stance seems to be a clear signal that future rate action is likely to be data-dependent.”

Anita Gandhi, whole-time director, Arihant Capital Markets, Mumbai

The recent hike in crude prices and better GDP for the last quarter of FY18 suggest inflation trajectory may be on the higher side. Though, this may put some pressure on borrowers, it is positive news for the savers in the economy.

Representational image. Reuters

Representational image. Reuters

Sudhakar Pattabhiraman, Head - Research Operations, William O'Neil's Marketsmith, Mumbai

I was not expecting the hike to happen this month, but was expecting it in August. If the current trend of increasing inflation and oil prices continues, we expect another 25 bps hike somewhere during the year.The committee seems to be pretty clear that there should not be an effect from the rate hike on economic growth.

If we talk about a series of rate hikes, with time economic growth will definitely slow down. Investments and sectors such as housing and construction will definitely slow down a bit, which will affect the GDP growth. Rate hikes alone cannot arrest the depreciation of the rupee. The RBI has taken a neutral stance. Some of the banks have already raised interest rates. Inflation and bond yields are on the rise. Considering all this, we were expecting them to be more hawkish. At this point, inflation is still within the Monetary Policy Committee’s range of 2-6 percent and growth rate is still in the early stages of recovery.

Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers, Mumbai

During this calendar year, the Reserve Bank of India is unlikely to do any further rate hikes, and beyond that, it will be extremely data-dependant. With the normal monsoons, we don’t see much upside to oil prices from the current level, and also we expect the industrial production growth to falter after few months of pretty strong growth. We don’t see further strengthening of inflationary forces, but we see some weakening of growth parameters.

The RBI has more direct tools if it really wants the rupee to move in a particular direction. Broadly speaking, having delivered a rate hike, the RBI thinks they are in a stable zone. I think for RBI, the outlook will be far more stable.

Sumedh Deorukhkar, senior economist, BBVA, Hong Kong

Rate hike is pre-emptive and in line with the Reserve Bank of India’s neutral-to-hawkish policy tone. The RBI has sounded more sanguine over growth prospects going forward, while flagging upside risks to inflation, particularly emanating from higher crude oil prices and the wage-price setting process due to closure of output gap.

Expect one more rate hike before the end of calendar year 2018 if core inflation remains elevated despite some potential moderation in growth. Growth recovery, although uneven, remains on track. Higher rates will weigh on growth, but only with a lag. Foreign investors remain sanguine over India’s long-term growth story and the credible reform momentum over the recent years. The latest hike underscores RBI’s policy credibility in line with its inflation targeting regime.

Avnish Jain, Head – Fixed Income, Canara Robeco Mutual Fund 

Against general market consensus of pause in rates, the Monetary Policy Committee (MPC) unanimously agreed to hike repo rate by 25bps, though they kept the stance as “neutral”, giving some relief to the  market. The MPC noted that while inflation in recent past has evolved according to RBI projections, the sharp rise in crude prices coupled with general increase in global commodity prices, uncertainty on impact of MSP increase may lead to higher inflation, though expectations of good monsoon should keep food inflation benign. Accordingly the inflation forecast for 2HFY2019 was increased to 4.7 percent from 4.4 percent. Further the MPC noted that growth prospects were improving with better capacity utilisations, increasing credit offtake and acceleration in investment activity.

With the MPC stance at neutral, the committee is likely to be continue to be driven by incoming data especially impact of MSP increase, progress of monsoons and crude price movement.

Tanvee Gupta Jain, chief India economist, UBS Securities India Pvt Ltd, Mumbai

We were already pricing in a 40 pct probability of a rate hike in this policy, and 50 bps rate hike in FY19. We do expect one more rate hike by the Monetary Police Committee over the next few months, most likely in August, if oil prices continue to remain higher. After incorporating a 50-bps rate hike, and also assuming there will be tax cuts to be announced, we now expect GDP growth at 7.3 percent vs 7.4 percent in FY19.

Rajni Thakur, economist, RBL Bank 

The “dovish rate hike” decision by monetary policy committee validates rising inflationary concerns in markets. A 25 bps rate hike on back of 30 bps increase in its inflationary forecasts for H2 2018-19, confirms the expectations of durable price pressure in the economy in coming months. While the message on growth revival taking roots remains positive, with continued neutral stance, it has kept its options on further rate action open and will likely stay data dependent.

Shishir Baijal, Chairman & Managing Director, Knight Frank India 

The RBI’s stance of increasing the policy rate by 25bps is in line with our expectation considering that the crude oil flared inflation level and the interest rates in the broader economy have been marching higher for some time now. However, this increase in policy rate will delay the revival of the country’s housing market, which after suffering a prolonged period of slump has just begun to show early signs of improvement on account of uptick in affordable housing.

Rajiv Sabharwal, Managing Director & CEO, Tata Capital

An interest rate hike was imminent amid good GDP growth numbers in the fourth quarter of 2017 -18. Uncertainty in global financial markets has also increased since the last policy meeting and FPIs are unwinding their positions. The growing economic concern in the Eurozone has also added to the uncertainty. Persistent rise in crude oil prices have raised inflationary expectations forcing the Reserve Bank of India to increase rates.

Interest rates on deposits and loans may inch up as we expect further tightening of rates in the coming months. However GDP growth will create more job opportunities fueling the growth of Housing and Consumer loans. As Tata Capital we will work on competitive loan products through innovation in speed, service and processes.

Rajesh Shah, Co-Chairman and Managing Director, Mukand Ltd

The announcements today by the RBI clearly signal their concern over rising inflation yet they indicate they do not wish to slow down capital expenditure and the welcome increase in industrial output. The capital intensive steel industry has very ambitious investment plans to meet the country’s rapidly growing demand of steel and I believe such investment will happen.

Abheek Barua, Chief Economist, HDFC Bank

Sensible and cautious response to the risks that have unfolded since the last meeting. This is not likely to be end of the hike cycle as domestic price risks such as MSP hikes and firm global commodity prices would warrant further monetary action.

Vipin Khare, Director - Research, William O'Neil India

Amid rising crude oil prices and growing inflation concerns, India’s central bank gave in and hiked the repo rate by 25 bps – the first time since January 2014. This also marks the maiden interest rate hike under the NDA government.

All the six members of the Monetary Policy Committee (MPC) voted in favour of a rate hike citing concerns of higher oil prices, rising inflation and a depreciating rupee. The reverse repo rate was also hiked by 25 bps. The repo and reverse repo rates now stand at 6.25% and 6%, respectively.

Wednesday’s interest rate decision caught many analysts by surprise, as a majority of them were expecting the bank to maintain status quo. However, the growing difference between repo rate and government bond yields in recent times indicated that a rate hike was around the corner.

The Indian stock market seemed to have priced in the rate hike, as major indices held onto their gains to snap a three-session losing streak.

In the near future, the MPC expects inflation to remain below 5% and come around 4.8-4.9% in H1 FY 2018. The second half of the fiscal could see inflation moderating to 4.7%. On the economic growth front, the MPC retained its GDP growth forecast at 7.4% in FY 2019. The apex bank also noted visible improvement in overall investment activity, which could get a further boost from resolution of NPAs in distressed sectors.

With RBI rate hike done and dusted, the stock market will now shift focus towards other factors such as monsoon rains, domestic currency movement and the trend in global crude oil prices.

Dhananjay Sinha- Head Institutional Research, Economist & Strategist at Emkay Global Financial Services

RBI catches up with the market with a 25bp hike; a precursor to a tightening rate cycle. The announcement of 25bp rate hike by RBI today broadly encompasses considerations of upside revision in inflation trajectory going ahead, impact of rising commodity prices and rising global yields, led by tightening of US dollar liquidity. With this hike the RBI has finally reversed the 25bp cut it initiated in Aug’17, while retaining neutral stance, in the aftermath of demonetisation and impact of GST implementation, which led to surplus liquidity condition. Even With this rate hike the stance is still not of tightening. In our view, this rate hike could lead to a tightening stance if the inflation risks accentuate along with currency depreciation.

In our view, before today’s hike, the RBI was already behind the curve as the GSec yield curve, money market curve and implied forward rates from the currency market had been pricing in more than 50bp hike.

Clearly, the risk to rate sensitive sectors, banking NBFC, reality, cap goods, has materialized as expected. We believe as the expectations on future hikes materialize, these risks can become more relevant. The key thing to watch is whether growth recovers strong enough to compensate for rising rates. We maintain our view that fair value for 10 year GSec is at 8.4 percent.

VK Sharma, Head Private Client Group & Capital Market Strategy at HDFC Securities

The RBI decision to hike rates is  a step in the right direction. The policy is hawkish on inflation but we like the confidence shown in the economy growth. Despite inflationary pressures RBI has stuck to its growth projections and guided for robust investment activities  for FY19. Despite the hike, the stance is still neutral , which is good . This puts RBI ahead of the curve.

Anis Chakravarty, Lead Economist and Partner, Deloitte India

The Monetary Policy Committee (MPC) presented a balanced view of the emerging market economies (EMEs) and the domestic economy, while alerting on the rising risks from crude prices and the increasing financial market volatility. The RBI was cautious on the factors that could change the course of the underlying optimism, major among them being the projections on oil price movement and rising geopolitical tensions. Keeping these developments in mind and the ensuing external risks, the committee hiked the key interest rate by 25 basis point to 6.25%, after a four year gap. While consumption and investments are expected to remain on an upward tangent, the easing in export orders and equity markets can put a downward pressure on growth. We expect inflation to maintain a northward momentum, especially if oil prices and rupee valuation do not stabilise in a scenario of hardening of domestic consumption. However, given that the committee has maintained a neutral stance, there remains room for manoeuvrability in policy perspective should incoming data show sharp fluctuations.

Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund 

Market players were increasingly coming to expect a hike given the turn of events in recent months. There has been an increase of 30 bps in Inflation forecast for H2 FY 19 while keeping H1 forecast broadly in same range with upside risks. GDP forecast for FY 19 has also been maintained. The RBI statement also throws light on the surprising movement in banking system liquidity. While in early May GST collections put pressure on liquidity, towards later part of May liquidity has suddenly ballooned due to govt spending primarily on account of food subsidies and this explains the usage of two widely different tools used within same month i.e. OMO purchase of 10,000 cr and CMB issuance of Rs 20,000 crore

Apart from this, the more important steps in this policy has been taken outside the ambit of rates. There are four important ones: a) The total carve-out from SLR available to banks would be 13 per cent of their NDTL as compared to 11 percent earlier which may have a salutatory negative demand on govt securities. b) A very significant change albeit one which was expected (as the regulator gave enough hints in previous policies) on valuing SDLs by banks wherein most SDLs purchased were valued at a uniform 25 bps over Gilts whereas market spreads were far higher. SDLs would now have to be valued at market levels. This would help in realigning the demand for SDLs and correcting the spreads to more realistic levels. c) Banks have been given further leeway in spreading their MTM losses on investments. d) Short Sale limits are being further enhanced and liberalized both in regular and when issued market. Expected to be positive for banks and PDs to enable them to take two way views.

 Adhil Shetty, Co-founder and CEO, BankBazaar.com:

The decision is on expected lines and a well-thought out precautionary move to stay ahead against a backdrop of global volatility in crude and elevated commodity inflation worldwide. The move has reined in inflationary expectations which will help cushion the rupee as well.

The central bank has further retained its GDP growth projection for 2018-19 at 7.4 percent and for banking sector in particular,  RBI has allowed 2 percent more SLR (statutory liquidity ratio)  to meet liquidity coverage ratio. This will particularly help banks in distress.

My advice to home  buyers would be: Existing borrower may not immediately witness any change in their EMI amount, but a higher interest rate would eventually increase the long-term interest out-go. One of the ways to protect yourself is by making a pre-payment that would lower your overall interest outgo. This would be particularly a good move for those at the beginning of their loan tenure. But if you are nearing the end of your loan, it is wise not to take any steps and simply maintain the loan till the end of its tenure to collect any useful tax deductions. You can also adopt a wait and watch policy for a quarter and take time to understand the impact of the rate hike on your loan. If there is a significant impact, you can explore transferring the home loan to other banks after a comparison of the rates offered to grab the best deal.  Simultaneously, you can also increase your savings or step up your investments to pre-pay your loan so that the interest outflow is not as high

​Sujan Hajra, chief economist and executive director, Anand Rathi shares and stock brokers, Mumbai 

During this calendar year, the Reserve Bank of India is unlikely to do any further rate hikes, and beyond that, it will be extremely data-dependant. With the normal monsoons, we don’t see much upside to oil prices from the current level, and also we expect the industrial production growth to falter after few months of pretty strong growth. We don’t see further strengthening of inflationary forces, but we see some weakening of growth parameters.

The RBI has more direct tools if it really wants the rupee to move in a particular direction. Broadly speaking, having delivered a rate hike, the RBI thinks they are in a stable zone. I think for RBI, the outlook will be far more stable.

Chandrajit Banerjee, Director General, CII

CII has noted RBI’s concern on anchoring inflationary expectations and the cautious approach of the RBI towards tackling the growth – currency - inflation dynamics. Given that inflation is being led by supply side issues, CII believes that raising interest rate would hurt growth while proving unequal to the task of tackling inflation. CII is hopeful that, going forward, with better clarity emerging on parameters which have a bearing on inflation -such as the turnout of monsoon, the impact of revisions in the minimum support prices for kharif crops, volatility in oil prices, and the possibility of fiscal slippage, among others - the RBI would reassess and revert to the policy of benign interest rates which would be growth supportive.

Tanvee Gupta Jain, chief India eonomist, UBS Securities India Pvt ltd, Mumbai

We were already pricing in a 40 pct probability of a rate hike in this policy, and 50 bps rate hike in FY19. We do expect one more rate hike by the Monetary Police Committee over the next few months, most likely in August, if oil prices continue to remain higher. After incorporating a 50-bps rate hike, and also assuming there will be tax cuts to be announced, we now expect GDP growth at 7.3 percent vs 7.4 percent in FY19.


--With inputs from Reuters



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Updated Date: Jun 06, 2018 17:32:28 IST

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