The RBI‘s decision to raise the lending rate by 35 basis points has been welcomed by most economists and BFSI stakeholders, who anticipate another moderate hike in the next cycle before inflation falls below 6%. However, they have expressed concern over higher interest rates that will increase the cost of borrowing for MSMEs.
Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company: The RBI has given a “Main Hoon Na” (we are there) policy, reassuring the market. In a world where central banks are fighting to regain credibility, the RBI stands tall managing conflicting objectives of growth and inflation admirably. A data-driven RBI will keep on playing balls on merit and continue to keep the growth scoreboard moving with inflation under check.
Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank:
After the heavy front loading of rate hikes during the first half of the financial year, the repo rate now – at 6.25% after today’s hike – is the highest in almost four years. In absence of fresh surprises, one does not expect the repo rate to cross the 6.5% mark in the current hiking cycle. That might mean a real repo rate of over 1% and a nominal spread of about 1.5% between Indian and US policy rates by the mid of 2023. It is heartening that the RBI sounded more supportive as regards future need of liquidity of the banking system and productive sectors of the economy.
Madhavi Arora, Lead Economist, Emkay Global Financial Services:
The tone was still cautious and data dependent, with the governor emphasizing the need to calibrate the policy. A 35bps hike today implies the ex-post real rates still sub 1% — RBI’s estimated real neutral rate, keeping 6-month ahead inflation as an anchor (a more certain trajectory vs one-year ahead), which may imply more space for another shallow hike of up to 25bps to reach a neutral rate (albeit not necessarily implying end of cycle). We are closely watching the global pace of inflation deceleration and how the impending recession will shape developed market (DM) central bank policies, which could influence the RBI’s reaction function.
Nitin Shanbhag, Sr. Executive Group VP, Head, Investment Products, Motilal Oswal Private Wealth:
RBI policy action was on expected lines and hence yields across the curve haven’t moved much. Apart from inflation trends, we believe that RBI will also be guided by USD-INR movement in determining further policy actions. There is hardly any term spread between the 10-year yield and 3-5 year yields for both G-sec and AAA segments. Hence, for core fixed income portfolio allocation, we continue to maintain a bias towards Target Maturity Funds, which invest in the 3-5 year maturity bucket with the underlying portfolio being a combination of G-sec, State Development Loans (SDLs), and AAA-rated instruments.
Dipanwita Mazumdar, Economist, Bank of Baroda:
In the current cycle, we see another 25bps rate hike which we expect to materialize in February 2023. Though some of the BRICS nations have already shown some relief on CPI numbers, domestic inflation is still likely to be elevated for FY23. A below 6% print may be feasible only in FY24, that too because of an inflated base and impact of lagged transmission on growth. Rabi crops would get relief from good northeast monsoon and adequate reservoir levels. However, wariness should prevail with regard to the reversal of the seasonality decline in tomato and potato prices.
Prabhat Chaturvedi, CEO, Netafim Agricultural Financing Agency:
Going forward, the rate hikes would start impacting the growth of the domestic economy. The central bank must maintain the neutral or positive zone of the repo rate while focusing inflation control within a tolerated threshold. As the country is on a bright spot in the global economy, currently, it’s an opportunity for India to grow and consolidate gains. As India wants to make MSMEs self-reliant, higher interest rates will increase the cost of borrowing for MSMEs. It could lead to a slowdown in investment and expansion plans and impact profitability for the sector. MSMEs are already battling inflation headwinds, lower demand, and loan interests. As MSMEs require certainty of funds, we believe they would be at the edge to absorb this surge in the repo rate.
Vikas Garg, Head of Fixed Income, Invesco Mutual Fund:
Resilient domestic growth provides flexibility to maintain a tight vigil on the inflation trajectory amidst global as well as domestic uncertainty. Global factors remain critical for policy action. Overall, marginally hawkish commentary than the market expectations. Future rate actions to be more data dependent with a possibility of reaching towards the end of the rate hike cycle.
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