The Reserve Bank of India's key policy repo rate was raised by 50 basis points on Friday, the third increase in as many months to cool stubbornly high inflation.
With June retail inflation hitting 7%, economists polled by Reuters had expected another rate hike, but views were widely split between a 25-bp move or a 50-bp increase.
The monetary policy committee (MPC) raised the key lending rate or the repo rate to 5.40%. The Standing Deposit Facility rate and the Marginal Standing Facility rate were accordingly adjusted higher by the same quantum to 5.15% and 5.65%, respectively.
COMMENTARY
PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI
"The central bank's action is largely along expected lines and will be seen as part of a series of steps to take the policy rate to neutral viz. near 6%. Roughly 1% positive real rate over 5% CPI expected in the June quarter 2023."
"The governor noted that the central bank is ready to conduct liquidity operations on both sides i.e. inject and absorb liquidity through the repo facility as required. This is an indication that the RBI is adopting a neutral stance even though it hasn't explicitly changed its forward guidance language."
NIKHIL GUPTA, CHIEF ECONOMIST, MOTILAL OSWAL GROUP, MUMBAI
"Overall, the RBI's action and statement were not as dovish as we had expected. Therefore, it is very likely that the terminal rate in this rate-hike episode will be higher than our expectations. We, thus, revise it to 5.75-6% from 5.5% expected earlier."
AURODEEP NANDI, INDIA ECONOMIST, NOMURA, MUMBAI
"The RBI's 50-bp hike was largely in line with market expectations, divided between it and a 35-bp hike. With the RBI retaining its policy stance of 'withdrawal of accommodation', the implicit message is that rates are yet to reach neutral territory, and that more rate hikes are warranted – a view that we agree with. The RBI continues to signal that all options are on the table, which is a prudent strategy given the elevated levels of uncertainties on both growth as well as inflation."
RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE
"Policy guidance highlighted it was premature to go easy on the inflation fight as the trajectory is beholden to fluid global commodity cycle, remnant passthrough pressures from high input costs and the recent rupee depreciation might lower the net beneficial impact of softer imported pressures."
"In our view, this necessitates the monetary policy committee to continue to incrementally tighten policy in the rest of FY23. Marking a departure from practice, the central bank also discussed the health of external balances, but maintained that the scale of rupee depreciation was much more contained than in regional peers and selected reserve currencies."
KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU
"The RBI echoed our view that peaking of inflation is not necessarily followed by easing of price pressures to comfortable levels. Inflation this year is unlikely to drop below the RBI's upper comfort zone of 6% and, hence, the central bank raised the policy rate by 50 bps as was expected by us. Persistence of high inflation leads to entrenchment of expectation."
"The RBI rightly retained its inflation forecast for FY23 at 6.7%, while we are at 6.5%. We do expect inflation to drop below 6% from 2023 which is what the RBI expects too. We continue to believe that one more hike of 35 bps will bring to the current rate hike cycle to an end."
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI
"The MPC's decision to raise the policy repo rate by 50 bps seems to be driven more by the latest tightening by global central banks, including yesterday's action by the Bank of England. As stated by the governor, India has witnessed FPI capital outflows to the tune of $13 billion in FY23 so far and the rupee has depreciated by 4.7% until yesterday. No doubt that this front-loading of interest rate hikes is facilitated by improved economic outlook and steady pickup in lending activities of banks and NBFCs."
SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, GURUGRAM
"The RBI continued to 'front-load' its rate hikes in line with our expectations. The central bank highlighted that while inflation might moderate in the coming months, uncertainty around these pressures continues to remain high, necessitating the need for a 50-bp rate hike. Expect the RBI to take the repo rate to 5.75% in this cycle."
"We expect liquidity surplus to average at 3 lakh crore rupees in Q2, supported by the RBI's fine-tuning of operations, an increase in government spending and a lower need for forex interventions given the recent rupee rally. Bond yields are likely to reverse some of their recent rally and we see 7.3-7.4% as a more sustainable level for the 10-year yield by quarter-end."
UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
"The MPC's decisions have been in line with our expectations. Given the increasing external sector imbalances and global uncertainties, the need for front-loaded action was imperative. We continue to see a 5.75% repo rate by December 2022."
GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI
"To rein in inflationary pressures and anchor inflation expectations, the MPC hiked the repo rate by 50 bps and retained its stance on withdrawal of accommodation."
"After today's policy, we expect a hike of another 25 bps and expect MPC to become data-dependent while it assesses the impact of recent hikes on inflation. Amid signs of a peak out of DXY and encouraged by the recent sharp correction in global commodity prices, we expect the rupee to remain supported in the rage of 79-80.5 even as high trade deficit prints remain a risk."
"As risks of a global slowdown get priced in, the 10-year yield is likely to oscillate in the range of 7.15 to 7.35... in tandem with movements in global yields."
