RBI Credit Policy

RBI Credit Policy

The Reserve Bank of India (RBI) has raised key rates by a higher-than-expected 50 basis points, stressing that tackling inflation is its main concern even if it comes at the expense of overall growth in the short-term.

The central bank raised the repo rate, its lending rate, by 50 bps to 7.25%, and the reverse repo, its borrowing rate, also by 50 bps to 6.25%. The market had expected a 25 bps hike by RBI.

According to Vibhav Kapoor of IL&FS the RBI's strong rate signal is a positive move. "The RBI definitely needed to show that it was in control of the situation and that it would fight inflation come whatever may be because ultimately, in the medium-term, high inflation means low growth rates and stagnation of the economy," he said.

Commenting on the initial drop in market levels, Kapoor said, "This will get sort of get priced in and after that you might see a reasonable sustainable bottom. Also over the next few weeks or months, lot is going to depend on how international commodity prices and oil prices behave."

“If they do start to come down at some point of time that could really be a good positive. Also, the monsoons over the next two months in June-July could become very important from market point of view, because if the monsoons are good that would definitely help controlling inflation and would be a positive,” he said.

On the downside, Kapoor said the risk still continues to be inflation and interest rates "They [RBI] may have to increase beyond, say another 50 basis points. Then the market would take that negatively,” he felt.

Dipan Mehta, member of NSE & BSE feels the market fall after the rate hike creates a foundation for the markets to rally. “Every time the RBI raises the interest rate we come that much, one-step closer to reach a situation when they will stop hiking interest rate because it cannot go on up indefinitely. Now, expectation is for another 50 basis point hike,” he said.

“Hopefully, by then we will have some control over the international commodity prices and also how the government is going to deal with local diesel and petrol prices. All in all, the next few weeks or next two-three months maybe tough for the market, but it’s okay so long as we have answers to how all this is going to eventually end,” he said.

Commenting on the bond market picture, Nilesh Shah of Axis Bank said “The hawkish statement by RBI in this policy will definitely push rates a little bit on the higher side for the time being.”

However, Shah said, they will also take into account the steps that are being taken to deepen the bond market in the form of credit sops and increasing the limit on short-selling. "The bond market is deeply and interested movement will now be depending upon the market players."

From the equity point of view, he said, "Over a period of time, most people will realise that these steps taken by RBI is for the longer-term stability of the country, longer-term sustenance of the growth. In the near-term, it may have a little bit pain in terms of growth but over a period of time will work out well."

On further rate hikes, Shah said, it would be reasonable to accept that this rate hike is not final and there will be more baby steps taken in the future if inflation doesn’t come under the control of RBI.