RBI raises repo rate by 50 bps to 4.90%; inflation has become global, says Governor Shaktikanta Das

RBI raises repo rate by 50 bps to 4.90%; inflation has become global, says Governor Shaktikanta Das

India facing new challenges each passing day due to war, said Governor Das

FPJ Web DeskUpdated: Wednesday, June 08, 2022, 07:28 PM IST
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RBI Governor Shaktikanta Das said the MPC vote was unanimous and has decided to keep stance withdrawal from accomodative. | File pic

The RBI Monetary Policy Committee (MPC) has voted unanimously to raise repo rate by 50 bps to 4.90 percent.

Today's rate hike follows a 40-bps rise in early May at an unscheduled meeting that kicked off the central bank's tightening cycle, which economists expect to be relatively short. "Upside risks to inflation as highlighted in last policy meetings have materialized earlier than expected," Governor Shaktikanta Das said after the policy decision.

The Standing Deposit Facility and Marginal Standing Facility rates were raised by 50 basis points to 4.65 percent, and Marginal Standing Facility rate to 5.15 percent.

The RBI MPC vote was unanimous and has decided to keep stance withdrawal from accomodative to ensure inflation remains within target going forward.

Earlier, the policy repo rate was at 4.40 percent, after the MPC's surprise move to hike the repo rate — the rate at which the RBI lends money to commercial banks — by 40 basis points. The Standing Deposit Facility Rate was at 4.15 percent and the Fixed Reverse Repo Rate stood at 3.35 percent.

10-year bond yield falls, Rupee up after RBI policy hike

India's 10-year benchmark bond yield fell to 7.5 percent after the policy decision, while the rupee strengthened against the dollar to 77.69.

Indian economy is resilient

Shaktikanta Das said, "Inflation has steeply increased much beyond the tolerance level. Process of recovery in emerging market economies is also getting affected. But the Indian economy has remained resilient. We have started a gradual withdrawal of the extraordinary accommodation. RBI will continue to be proactive and decisive in mitigating the fallout of geopolitical crisis on our economy. Our steps will be measured, calibrated."

Inflation has become global

We are facing new challenges with every passing day due to the war. War in Europe is lingering, challenges accentuating supply chains. Recovery is gaining momentun despite the pandemic and war. On the other hand inflation has become global, RBI Governor Shaktikanta Das.

Ongoing war dampener on global trade, growth

Governor Das said, The ongoing war turning out to be a dampener on global trade and growth. Domestic economic activity is gaining traction while inflation pressures have intensified faster. Inflationary pressures have become broad based and remain largely driven by supply shocks. Repo rate remains below its pre-pandemic level. Inflation is likely to remain near upper tolerance of 6 percent for first three quarters of this year. Sustained high inflation could unhinge inflation expectations.

Urban, rural demand improving

Information for April-May suggests domestic economic recovery is firm. Urban demand is recovering, rural demand is also improving and while urban demand is recovering, rural demand is gradually improving. Surveys show capacity utilisation in manufacturing sector increased to 74.5 percent in January-March.

GDP growth projections at 7.2%

GDP growth for the current year has been retained at 7.2 percent. RBI believes Q1 will see GDP grow at 16.2 percent while Q2 GDP growth is expected to be at 6.2 percent, Q3 is seen at 4.1 percent and Q4 GDP numbers are expected to be at 4 percent.

Signification moderation seen in inflation expectations

Survey of urban households following recent fuel excise duty cut showed “significant moderation” in inflation expectations. Urban households’ three-month-ahead inflation expectations declined by 190 basis points, while one-year-ahead inflation expectations declined by 90 basis points.

RBI inflation forecast

RBI Inflation forecast assumes normal monsoon and crude basket price at $105 per barrel. The monetary policy accomodation withdrawal will be calibrated keeping in mind requirements of economy. Baseline inflation forecast assumes a price of $105 per barrel for the Indian crude oil basket. It also does not take into account MPC’s actions today.

Strength of banking system to help economic recovery

RBI Governor Shaktikanta Das said, While normalising pandemic-related measures, RBI will ensure adequate liquidity in the banking system. We are monitoring the government securities (G-sec) market very closely and necessary steps will be taken as and when required. I have not mentioned any particular steps RBI might take, but we will ensure orderly completion of government’s borrowing programme. Strength of banking system will help economic recovery. As on June 3, our foreign exchange reserves stood at $601.1 billion.

Loan rates revised

Limits on individual home loans given by urban and rural co-operative banks are being revised upwards more than 100 percent taking into account the rise in housing prices over the last decade.

Urban co-operative banks can now extend doorstep banking services to their customers.

Rural co-operative banks can now extend finance to commercial real estate, or loans for residential housing projects.

What does rate hike mean for consumers?

The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12 percent and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments.

Anuj Puri, Chairman, Anarock said, The silver lining is that the Indian housing market is still largely end-user driven, so there is no investor mindset seeking the lowest possible entry point. Genuine demand comes from an underlying aspiration for homeownership.

Rate hike enables more headroom for Urban, Rural banks

Dinesh Khara, Chairman, State Bank of India

Uncertain times demand unconventional measures. Owing to persisting global uncertainties, RBI has hiked rates by 50 basis points and revised the inflation projection to 6.7 percent. The policy statement is a comprehensive assessment of uncertainties and is an affirmation of coordinated policy action by the Government and RBI to thwart the dangers of inflation. Enabling more headroom for Urban and Rural Cooperative Banks for financing the housing sector will bring about a level playing field in the cooperative banking space. Linking Rupay credit cards to UPI will add more avenues and convenience to custom

Repo rate hike due to elevated inflation: Kotak Mahindra Bank

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The 50bps repo rate hike comes on the back of persistence of elevated inflation and the continued upside risks. Given that inflation is expected to remain above 6 percent through 3QFY23 , RBI has to frontload actions. We continue to see another 60-85bps hike in rest of FY23 to manage inflationary expectations.

Withdrawal of accommodative stance disappointing: PHDCCI

Pradeep Multani, President, PHD Chamber of Commerce and Industry

Hard lending from an accommodative policy stance is disappointing as it will have an impact on costs of doing business and production possibilities. Though RBI’s decision to raise the repo rate is in synchrony with its efforts to tackle persistently heightened inflation, however it will impact India’s economic growth due to dampened demand scenario and discouraged consumer and business sentiments.

Any increase in the interest rate increases the costs of doing business, which are already high vis-a-vis high raw material costs amid geo-political distress.

Rate hike inevitable

Atanu Kumar Das, MD & CEO, Bank of India

Policy announcement is on expected lines, reflecting the Central Banker’s continued focus on a non-disruptive trade off between growth and price stability, in a calibrated manner.

Dhiraj Relli, MD & CEO, HDFC Securities

The outcome of the MPC meet was in line with most of our expectations except that the repo rate hike came in at 50 bps vs 40 bps expected by us. RBI noted that inflation pressures have intensified and expects inflation to remain above the upper tolerance band of 6 percent for the first three quarters of FY23. The RBI hiked CPI inflation forecasts by 100 bps to 6.7 percent (vs earlier forecast of 5.7 percent). The MPC policy actions’ impact on inflation will only materialise after couple of quarters. The RBI governor has hoped for more fiscal measures from the Govt to bring inflation under control faster.

While the real GDP growth projection for FY23 is retained at 7.2% percent based on the fact that drivers of domestic economic activity are getting stronger, they face headwinds from global spillovers in the form of protracted and intensifying geopolitical tensions, elevated commodity prices, COVID-19 related lockdowns or restrictions in some major economies, slowing external demand and tightening global financial conditions on the back of monetary policy normalisation in advanced economies. This number may come up for some downward revision in the forthcoming MPC meets. Absence of a CRR hike also was a relief.

While a revisit of the pre Covid repo rate of 5.15 percent over the next 1-2 meets is a given (vs 4.90 percent currently), most economists expect this to go above 5.15 percent. A lot in this regard will depend on how soon the inflation peaks out and begins to fall and when do the global Central Banks feel that they are done with the rate hikes for now.

Anuj Puri, Chairman, Anarock

As anticipated, with inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI has decided to increase the repo rate. A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales.

Considering that inflation continues above its target zone of 6 percent, a hike was inevitable, and it will doubtlessly have some repercussions on housing uptake. The RBI is tasked with controlling the spiralling inflation in the country but must simultaneously be careful to not hurt demand recovery. This is a tightrope walk under the best of circumstances. Overall, high inflation with low GDP can be cause of worry but as of now the Indian economy remains robust.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities

The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We expect 35 bps repo rate hike in the August policy to 5.25 percent and repo rate at 5.75 percent by end-FY2023. Along with pushing the repo rate to above the pre-pandemic level, a 35 bps hike would also signal a gradual normalization in the policy actions while being adequately hawkish. We also expect another 50 bps hike in CRR to 5 percent by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels.

Yash Gupta, Equity Research Analyst, Angel One Ltd

As expected, the repo rate was hiked by 50 bps to 4.90 percent. After the commentary of the RBI governor last month, the market has already expected a rate hike of 50 bps in the June meeting. So now the RBI has taken a decision on the rate hike of 50bps. We believe that this rate hike is already priced in the market. Along with this bank, rates have also increased by 50 bps to 5.15 [ercent, and withdrawal of the accommodative stance for the Indian economy.

A good takeaway for the market is that RBI has retained the GDP forecast of 7.2 percent for FY2023 and CPI inflation is expected to be at 6.7 percent for FY2023. Overall the policy is in the expectation of the market, a 50bps rate hike is already priced in the market now the market focus will be on the Fed rate hike.

Anjana Potti, Partner, J Sagar Associates (JSA)

With the retail inflation at 7.79 percent for April 2022, highest since May, 2014, the recent statements from the Governor, and signals from other major central banks, the hike does not come as a surprise. The only question that remained was how much of an increase in the short-term would address this. In the April MPC, the RBI had attempted to buttress economic recovery by maintaining status quo on the rates, only to increase the rates and the cash reserve ratio, through an off-cycle MPC, to control the galloping inflation. The RBI is fighting an uphill battle in the current geo-political situation to keep the inflation below the benchmark of 6 percent, which it has missed for the past four quarters. We can expect further jumps in the in the next few quarters.

Sampath Reddy, Chief Investment officer, Bajaj Allianz Life

RBI hikes key policy repo rate by 50bps to 4.90 percent, which was along expected lines. The markets were relieved, as there was no CRR hike. However, the RBI did remove the word “Accommodative” from the policy stance and decided to remain focused on withdrawal of accommodation. On the inflation front, the forecast for the FY23 has been raised to 6.7 percent from 5.7 percent earlier, due to the elevated commodities prices, which we believe is realistic. On the growth front, GDP growth rate estimates retained at 7.2 percent for FY23, which is a healthy growth rate in the current backdrop.

Overall, a significant part of the pandemic led “policy accommodation” has been reversed. Bond yields will track global crude oil prices, monetary policy stance of the major central banks and the inflation trajectory.

Parth Nyati, Founder, Tradingo

There is no surprise by RBI in this policy after a shock in the last unplanned policy for the market. The market welcomed the policy with a positive reaction as there was some fear of an outside 75 basis points hike in repo rate and hike in CRR. Banking stocks are showing strength after policy as a 50 basis hike was already priced in and there is no hike in CRR. The overall policy looks good from the market's perspective and now the market will look for US CPI numbers and the FOMC meeting next week.

Rajni Thakur, Chief Economist, RBL Bank

MPC decisions announced this morning- 50 bps hike in policy rates, resetting inflation projections and no change in CRR- were all broadly along the expected lines. Coming right after an inter-policy MPC in May, which kind of spooked the market a bit, RBI choosing to stay predictable this time will help sooth market sentiments. MPC’s CPI projections for FY23 at 6.7 percent now are more realistic in view of current geo-political uncertainties and their fall outs. However, with multiple risks on price levels driven largely by external factors, the rate hikes will help anchor inflation expectations and impact the actual inflation outcome to a much lesser extent. This also, makes it difficult to gauge a terminal rate level for the cycle, even though, continual rate hike expectations till pre-Covid levels have been firmed up by the fact that Monetary Policy stance has changed from “accommodative with focus on withdrawal of liquidity” to “focus on withdrawal of accommodation”. We now expect a further rate hike of 50 bps in August, taking repo rates higher than pre-COVID levels, followed by pause to re-access the macro-dynamics and hikes in smaller quantum thereafter pushing year end Repo-rates close to 6 percent levels.

Sunil Nyati, Managing Director, Swastika ​Investmart Ltd

​The RBI’s actions today were in line with the market’s expectations as the overall inflation numbers were far away from the central bank’s comfort levels. However, the silver lining was the untouched CRR rates and the market is rejoiced by the same. Nevertheless, the current inflationary pressures could increase further due to geopolitical factors and rising commodity prices.

Ram Raheja, Director, S Raheja Realty

The decision to increase the repo rate by RBI is in line with the industry expectation. Bank rate also spiked to 5.15 percent from 4.65 percent and limits on individual home loans given by urban and rural co-operative banks have been revised upwards more than 100 percent considering the rise in housing prices over the last decade. As the inflation is expected to remain above RBI upper range tolerance level of 6 percent till December this year; it will certainly have some repercussions on housing uptake. The RBI is focused on controlling the escalation of inflation in the country but must simultaneously be careful to not hurt the growth of the real estate market.

Rajiv Sabharwal, MD & CEO, Tata Capital Ltd

The 50 bps rate hike by the RBI is in line with the market expectations. The market has factored in the frontloading of rate hikes to anchor inflation trajectory. The hike, recent government measures and the expectation of a normal monsoon will help in inflation management. The RBI however remains cognizant of the broad-based nature of inflation and the upside risks. The incipient risk arising out of currency dynamics on imported inflation will also have to be watched closely.

Over the last few months, RBI has effectively used various tools to reduce surplus liquidity in a calibrated manner. RBI once again assures the markets that adequate systemic liquidity will be maintained which will stabilize the yield curve thereby meeting the needs of the economy. The bond market should derive enormous comfort from this positive assurance.

'Repo rate hike can make buyers apprehensive'

Lincoln Bennet Rodrigues, Chairman & Founder, The Bennet and Bernard Company, luxury holiday homes in Goa

The current round of hikes could make the buyers apprehensive and they might as well adopt a wait-and-watch attitude. But on a positive note, the continued wage and job growth in varied sectors will provide a cushion in the short term for the purchasing decisions.

The all-time low home loan interest regime in the recent past had boosted the housing demand and also enabled a robust recovery in the real estate sector post the pandemic. Today, people feel the inherent need to make progressive lifestyle changes to lead a more balanced and healthy life. The rate hike won’t have significant impact as home loan interest rates have already gone down substantially in the recent past and buying decisions may not be altered by these marginal changes. The outlook for India Inc looks positive with higher affordability and disposable income in the hands of new-age investors.

Rentals on commercial estate to go up

Kenish Shah, Co-Founder, PropReturns

The further bump in the Repo Rate to 4.9 percent to battle inflation will bring huge investments into the real estate industry. Savvy investors will now stray away from fixed-income investments such as FDs and government bonds that are losing to inflation. The smart move at this point will be to diversify their portfolio using higher yielding assets like Commercial Real Estate. As seen in patterns before, rental yields in commercial real estate will be pushed up due to the sudden hike in interest rates and will become a powerful wealth creation tool for many investors. The hike in interest rates is a boon for the real estate industry.

Expect MPC to hike policy by additional 40 bps this fiscal year: Elara Capital

Garima Kapoor, Economist, Elara Capital

Amid steady improvement in domestic economic recovery and with an aim to rein in inflation, the MPC today hiked policy repo rate. With inflation expected to remain above RBI’s mandate through FY'23, we expect MPC to hike policy repo rate by an additional 40 bps this fiscal year and target a terminal repo rate of 6.25 percent in the current hike cycle. Gradual tightening of domestic liquidity conditions, elevated crude oil prices, tightening of global financial conditions and risks of overshooting of FY'23 fiscal deficit is likely to put incremental pressure on the domestic bond yields. We expect 10 year bond yield to gradually move towards 8 percent over next 4 to 6 months.

Repo rate hike hurdle to home buyers: Sterling Developers

Ramani Sastri - Chairman & MD, Sterling Developers Pvt. Ltd

From a real estate perspective, this hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent on the homebuyer's sentiments. Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic.

Rate hike to impact infrastructure

Manish Lunia, Co-Founder of Flexiloans.com

The RBI hike in repo rate was impending due to the inflation spike and global macroeconomic scenarios. The overall increase of 1 percent in the cost of funds by the RBI over the last few months will impact the overall feasibility of large projects, infrastructure and long gestation projects. MSMEs, on the other hand, are recovering due to improved customer sentiment after nearly 2 years of uncertainty. MSMEs need more adequacy and certainty of funds versus costs alone and thus we believe they should be able to handle this increase, as long as this stays in this range for the medium term.

The increase in NACH mandate limits per transaction to Rs. 15000 from Rs. 5000 will expand quick access to credit to the customers. The silver lining is the calibration that RBI continues to hint for its monetary policy action in future - evenly balanced towards growth and fiscal stability measures

RBI policy action 'remarkable': MVIRDC World Trade Center

Vijay Kalantri, Chairman, MVIRDC World Trade Center Mumbai - a trade facilitating body

The key highlight of today’s RBI policy action is the remarkable upward revision in CPI inflation forecast for the current financial year from 5.7 percent to 6.7 .percent With this upward revision, RBI has implicitly conveyed that it is going to hike policy repo rates further in the coming months. We expect RBI to hike policy repo rate by another 100 basis points by March 2023 to control inflation.

Repo rate hiked to lower than pre-pandemic levels: Trust Mutual Fund

Sandeep Bagla, CEO, Trust Mutual Fund

Markets expect regulators to have better information and hence act proactively in order to maintain macro stability and equilibrium. Regulators need to prioritize their target variable between growth and inflation. In India, we have raging inflation at 7.8 percent, higher capacity utilization, and growing consumer confidence, and yet the policy rate has been hiked to 4.90 percent only, which is lower than pre-pandemic levels. The ideal effective overnight rate should be closer to 6 percent, but at this pace, it might take us 3-4 policies more to reach there. Monetary policies tend to work with significant lags on the real economy. The longer we wait in raising rates adequately, the more we are letting the underlying inflationary fires simmer. Don't expect inflationary expectations to come down and most likely the 10-year G-sec yield would trade between 8.25-8.50 in the next couple of quarters.

Hike in repo rate to moderate consumer demand

Rajiv Shastri, Director, and CEO, NJ AMC

The MPC's actions are in line with the minutes of their previous meeting and indications thereafter. Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers. Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term. However, there are some indications that global prices may moderate soon which may allow for a pause sooner rather than later.

'Inflation to continue to hurt consumers'

Madan Sabnavis, Chief Economist, Bank of Baroda

The credit policy clearly indicates that the major threat to the growth process is inflation. While growth is expected to proceed on a stable path, inflation has to be addressed which has led to a unanimous decision to raise the repo rate by 50 bps. With inflation expected to be 6.7% (BoB’s forecast is slightly lower at 6.5 percent) this year, it will take a long time to move to a positive real interest rate regime.

The higher interest rates will get transmitted directly for loans which are linked to external benchmarks such as home loans or SME loans. However, MCLRs will be slower to react in terms of quantum of change. The same will hold for deposit holders who will receive higher rates depending on how banks adjust their rates based on their funding requirements. As there is surplus liquidity currently in the system which can go for lending, the immediate response may be slow.

The RBI’s optimism on growth is significant because the performance of the economy in the first two months is quite impressive. Interest rate hike will help to ensure that growth is not affected as unchecked inflation can affect discretionary consumption, which in turn will affect growth. Higher repo rate also means that the SDF rate has gone up which will help banks earn higher return on surplus funds as it will be now at 4.65 percent.

Raghvendra Nath, Managing Director – Ladderup Wealth Management Private Ltd.

The inflation has been above the RBI's target range of 2-6 percent since the beginning of the year. With the ongoing Ukraine war and the COVID issues in China, the supply chain disruptions continue to affect global inflation. So, a rate hike of 30-50bps was expected by the RBI. The RBI has revised the inflation for FY23 to 6.7 percent, so inflation will continue to hurt the consumer pockets and company bottom-line for the coming quarters. We may see the food inflation coming down if the expectation of a normal monsoon this season turns out to be true. CRR was expected to be raised, but it seems RBI has decided to maintain the liquidity with banks for now.

Jaspreet Singh, Chief Investment Officer, Research & Ranking

The sharp increase in inflation expectations since February 2022 is clearly a reflection of the unlocking happening world over and intensified by the supply chain constraints led by the Russia-Ukraine crisis. The cumulative hike of 90 bps this year coupled with tax cuts, export duty increases, export bans, and normal monsoon expectations should arrest the rising inflationary trend. RBI's expectations of oil averaging at $105 can play spoilsport with the inflation target of 6.7 pecent if war and sanctions continue for long. The Repo rate which is presently at 4.9 percent, will rise above pre-pandemic levels of 5.15 percent before the end of the year. However, what is soothing to the market is that GDP in FY23e and also in FY24e is higher than pre-pandemic levels, and improving bank credit growth will keep this momentum going. Measures on improved credit availability to the housing sector is a welcome step.

Nitin Bavisi, CFO, Ajmera Realty and Infra India Ltd.

The RBI inflation trajectory above 6.5 percent is a cause of concern, but the big announcement was raising the limit of loans for the State Co-operative Banks and District Central Co-operative Banks to the housing sector. The housing sector is a capital-intensive business, these measures will address the growing need for affordable housing, providing easy and higher limits with enough funding avenues for the projects. It will improve credit flow to the sector and also act as a boost for housing projects in the rural areas, thereby ensuring the recovery in all pockets of the country.

While developers expect rationalization of increase in key input cost like steel and cement, coupled with interest rate reversal in home loan from a decade low rates may help the real estate sector to remain in the stable price regime.

Rate hike may squeeze corporate profits in immedate term: NJ AMC

Rajiv Shastri, Director, and CEO, NJ AMC

The MPC's actions are in line with the minutes of their previous meeting and indications thereafter. Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers. Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term. However, there are some indications that global prices may moderate soon which may allow for a pause sooner rather than later.

Boost to digital payments

Neeraj Dhawan, Managing Director, Experian India

The Reserve Bank of India has hiked the policy repo by 50 basis points with immediate effect, taking the rate to 4.9 percent, in order to keep inflation within the target limits. Significantly, the central bank announced steps to enhance digital payments and boost the credit eco-system by allowing customers to link their credit cards to transact through the UPI platform, improving customer convenience. UPI has become a widely used mode of payment in India and currently facilitates around 595 crore transactions in a month amounting to Rs 10 lakh crore only by linking savings and current accounts through debit cards.

Another key step was doubling the limit on housing loans from cooperative banks and permitting Rural Cooperative Banks (RCB) to finance residential real estate projects to support affordable housing and inclusive growth.

Repo rate hike, an opportunity for home buyers: Colliers

Ramesh Nair, CEO, India and MD, Market Development, Asia, Colliers

On expected lines, RBI hiked repo rate while continuing to move away from its accommodative stance. The hovering inflationary concerns amidst the resilient domestic economy supports this RBI’s aggressive move. Despite the challenging global environment, Indian economy is strongly placed and on the path to recovery and GDP growth is pegged at 7.2 percent for FY 2022-23. On a cumulative basis, this translates into an almost percentage point increase in repo rate in the last 1 month. However, it remains lower than the pre-pandemic level of 5.15 percent. We expect banks to gradually pass on this rise in the form of higher home loan rates in the coming months. An opportune time for homebuyers to take advantage of the prevailing home loan rates at a time when prices are also expected to rise in most of the markets led by revival in demand.

Rate hike to act as sentiment disruptor for home buyers: JLL

Dr Samantak Das, chief economist, and head of research and REIS, India, JLL.

The RBI has been decisive in its intent to mitigate the impact of inflation on economic growth by increasing the policy rates and gradual withdrawal of liquidity.

The rise in policy rate is expected to act more as a sentiment disruptor for the home buyers given that mortgage rates are likely to inch up. However, the impact of the rate hike on home loan EMIs is unlikely to be significant as these loans are for a longer tenure. Banks and Housing finance companies have only partially transmitted the previous policy rate hike. Also, interest rates are still likely to remain at decadal lows and hence, while the opportunity for homebuyers is reducing, it is critical to understand that affordability remains high and buying momentum is expected to remain largely intact.

50 bps increase in repo rate to pinch homebuyers

Shishir Baijal, Chairman & Managing Director, Knight Frank India

A repo rate hike of 50 bps was imminent given the current inflationary trajectory and geopolitical concerns. Although the government has taken various measures to control domestic inflation such as food export restriction and cut in excise duty, prolonged war and spike in global crude oil price is still worrisome.

From a real estate perspective, home loans are set to get costlier. Banks have already raised the interest rate on home loan by 30-40bps since the earlier repo rate hike by the RBI in May and now with the repo rate cumulatively higher by 90 basis point there will be further increase in interest rate for homebuyers. Rising interest rate along with elevated property construction cost and product price pressures could adversely impact on the real estate buyer’s sentiment.

Abhishek Kapoor, Chief Executive Officer, Puravankara Limited

Due to increased market consolidation and a rise in income and job opportunities, the marginal increase in repo rate by 50 bps is unlikely to have a significant impact on the demand. While this move by RBI will lead to increased home loan rates, this was an important step to stabilise the economy that is already reeling under inflationary pressure. The all-time low rates in the recent past had already paved the way for the growing demand in the sector, leading to a robust recovery post the pandemic.

Additionally, the sustained government spending on infrastructure, the uptick in private business investments, and the service sector will continue to fuel economic growth, thereby positively impacting the real estate sector.

Another rate hike expected: Axis Securities

Naveen Kulkarni, Chief Investment Officer, Axis Securities

May 2022 witnessed pro-active measures by the central government in the form of excise duty cut on petrol and diesel, a ban on wheat export, and other similar measures easing domestic inflationary pressures. However, keeping in view the ongoing geopolitical tensions, rising crude oil prices, and global inflationary input cost pressures, the regulator has increased its inflation estimate for FY23 to 6.7 percent vs 5.7 percentearlier. RBI has retained its growth estimates at 7.2 percent. We believe the market had already discounted a rate hike of 40-50bps, and the key monitorable was a commentary on inflation. We may witness another rate hike, probably of a similar quantum, in the next monetary policy to manage inflationary pressures.

Vivek Bansal - Group CFO, InCred

No surprise is the best thing out of the policy and the increase in Repo Rate is on expected lines. The policy also reflects on inflation expectations and there are factors on both sides which will play out over the next couple of months which will be very important on how the next policy action happens. It is also heartening to see that MPC has not left growth factors completely out of consideration and if inflation cools, growth may again take precedence. On balance, it looks like there could be one more 50 bps hike in next 3-4 months and then a extended pause which will be good for overall growth inflation dynamics. Besides policy rates there are some important announcements on payments and settlements with respect to enhancement of limits for recurring payments and most importantly UPI linkage to Rupay cards. RBI has signaled increasing usage of UPI by adding credit cards as well which hopefully will further increase UPI penetration and digital payments overall.

Aditi Nayar, Chief Economist, ICRA

While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 percent remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies. However, the upmarch in the yields will now be somewhat shallower than our earlier expectations.

Dr. Mohit Batra, Founder & CEO of MarketsMojo

RBI will try to tackle two issues in its upcoming monetary policy- tackle inflation and ensure that the rupee does not depreciate too much against the dollar. The last time when RBI revised its inflation target, crude was at $100 per barrel, and now it's trading at $120 per barrel, suggesting a risk of inflation flaring up is high. Keeping these facts like rupee depreciation and high inflation rate, I expect RBI to hike the interest rate by 50bps.

Madhavi Arora, Lead Economist, Emkay Global Financial Services

The 50bp rate hike in policy repo rate is in line with our expectations of RBI remaining front-loaded on rate hikes, after un-anchoring markets’ policy expectation in Apr/May. The stance continues to be focussed on withdrawal of accommodation. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favor of inflation containment. The reaction function is now evolving with fluid macro realities. The inflation prints of next two quarters are likely to exceed 7 percent, which could pressure the RBI into acting sooner rather than later.

FY23 could thus further see rates going up by 75 bps+, with the RBI now showing its intent to keep real rates neutral or above to quickly reach pre-COVID levels. Our Taylor’s estimate shows a max tightening of policy rate by 6 percent by FY23, of which liquidity tightening to 2 percentof NDTL is tantamount to another estimated 25 bps of effective rate hike.

However, the front-loaded rate-hiking cycle does not imply a lengthy tightening cycle, and once they reach the supposed neutral pre-COVID monetary conditions, the bar for further tightening incrementally may be higher amid increasing growth-inflation trade-offs.

Rajni Thakur, Chief Economist, RBL Bank

MPC decisions announced this morning- 50 bps hike in policy rates, resetting inflation projections and no change in CRR- were all broadly along the expected lines. Coming right after an inter-policy MPC in May, which kind of spooked the market a bit, RBI choosing to stay predictable this time will help sooth market sentiments.

MPC’s CPI projections for FY23 at 6.7 percent now are more realistic in view of current geo-political uncertainties and their fall outs. However, with multiple risks on price levels driven largely by external factors, the rate hikes will help anchor inflation expectations and impact the actual inflation outcome to a much lesser extent. This also, makes it difficult to gauge a terminal rate level for the cycle, even though, continual rate hike expectations till pre-COVID levels have been firmed up by the fact that Monetary Policy stance has changed from “accommodative with focus on withdrawal of liquidity” to “focus on withdrawal of accommodation”. We now expect a further rate hike of 50 bps in August, taking Repo rates higher than pre-COVID levels, followed by pause to re-access the macro-dynamics and hikes in smaller quantum thereafter pushing year end Repo-rates close to 6 percent levels.

Inflation level estimate, a cause for concern

DRE. Reddy, CEO and Managing Partner at CRCL LLP

The RBI today hiked the repo rate by 50 bps, with a focus on the withdrawal of the accommodative policy. The stage is set for a return of policy measures back to pre-COVID levels with an end of the easy money era.

The RBI estimating the inflation levels to remain above the 6 percent level for FY23 is a cause of concern. The recovery in rural demand is key to a growth rate above 7 percent for FY23. A normal monsoon, good crop year, and de-escalation of tension between Russia and Ukraine will help keep crude prices in check.

Tricky decision between growth, inflation

Honeyy Katiyal, Founder, Investors Clinic

The government and RBI need to choose between growth and inflation which always has been a tricky decision. Inflation across the globe has broken all records due to the present Russia-Ukraine war. Hope RBI will use discretion going forward, as inflated rates will hurt the real estate sector the most. We look forward to stabilizing the rate regime now.

Dr Nilanjan Banik, Prof Finance and Economics at Mahindra University on RBI Policy updates

RBI did the right thing by increasing the repo rate. This will complement the government's approach to contain inflation by reducing the excise duty on petrol and banning wheat and sugar exports. When monetary and fiscal policy works in tandem, like in this case, the impact on controlling inflation will be much faster. A tighter monetary policy will also help to prevent the value of the rupee from sliding further. India recently witnessed a widening trade deficit. Arresting the rupee value to fall further will have a positive impact on controlling India's trade deficit.

Shrihari Gokhale, COO, Lentra AI, an AI, ML, and Blockchain-powered platform that is accelerating embedded banking and lending.

While the MPC voted unanimously to increase the policy repo rate by 50 basis points to 4.90 percent, it is important to take into consideration that RBI has three broad mandates besides inflation – one is supporting growth, the other is assessing the government’s borrowings, and finally maintaining the payment and settlement system. And most important they have to balance all these. It is critical to understand that RBI slashed the repo rate in 2020 to cushion the impact of COVID and now the focus is back on regulating inflation. So, as the governor mentioned, we will have some ups and downs, and external influencers, such as crude oil, metals, and food in some cases, which are not in RBI’s control will also have a considerable impact.

Repo rate hike welcome for banking sector

Suman Bannerjee, CIO, Hedonova (an AIF firm that invests in crypto, equipment finance, Art, wine, P2P lending)

The increase in Repo rate is RBI blaring it’s teeth. This is very welcome for the banks as evident in their rising stocks price today but not very good for the broader economy. A higher repo rate sucks money our out the system and tames inflation. The RBI however said they expect inflation to increase by 1 percent over the next year, which, in my opinion renders todays rate hike in vain.

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