RBI hikes repo rate by 25 bps to 6.5 %, pegs FY24 inflation at 5.6%: Experts react

A hike in the repo rate today will lead to an increase in banks’ lending and deposit rates tomorrow.

RBI Governor Shaktikanta Das said the rate hike is intended to bring inflation back towards its 4 percent target.

With inflation seen at 5.6 percent in the fourth quarter of 2023-24 (April-March), adjusted for inflation, the policy rate still trails pre-pandemic levels, Das said.

While India’s headline retail inflation rate declined 5.72 percent in December 2022, the lowest in the last one year, easing for the third consecutive month, and December's consumer price index (CPI) inflation print came in lower than the upper band of RBI's 2-6 percent mandate, the aggregate inflation basket is still very sticky.

The MPC has raised the repo rate by a total of 250 basis points since May 2022, taking the repo rate to its highest since February 2019.

Tata Capital Ltd MD & CEO Rajiv Sabharwal said the hike will help RBI in controlling inflation and maintaining financial stability.

“This move will help tame the pressure on the economy caused due to the Fed rate hikes and other external market dynamics that have a direct impact on our domestic economy,” he said.

Downward momentum in inflation and an increase in RBI's foreign exchange reserves over the last few months have provided the necessary comfort to RBI, he added.

Invesco Mutual Fund Head of Fixed Income Vikas Garg said “continuation of ‘withdrawal of accommodation’ stance, in line with our expectation.”

He added that the “future rate actions will be calibrated and more data-dependent as we approach the end stage of the current rate hike cycle. Higher policy rates may stay with us for a bit longer.

Yes Bank Chief Economist Indranil Pan opined that “the rate hiking cycle of the RBI may yet not be over.”

“We remain open to another 25bps increase in the repo rate in April or even later and will critically depend on the inflation prints in the months ahead. For the record, our model suggests that the next CPI print can surprise on the higher side to 6.2-6.4%, as food prices are seen to have largely normalized based on data obtained from the Department of Consumer Affairs,” he stated.

ICICI Securities Chief Economist Prasenjit Basu noted that the RBI sees little need to ease monetary policy in the year ahead with credit growth at its healthiest in 8 years, and real GDP growth resilient amid the global downturn, the RBI sees little need to ease monetary policy in the year ahead.

Senior Economist at Kotak Institutional Equities Suvodeep Rakshit said, “We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April."

According to Lakshmi Iyer, CEO-Investment Advisory, Kotak Investment Advisors Limited, “While chances of pause still remain, the uncertainty may persist. Expect range bound yield movement till then - oscillating between global data and domestic cues."

Reacting to today’s RBI Monetary Policy, Senior Managing Director Essar Capital Ltd. Sanjay Palve said: “While the global economic outlook is recovering slowly, inflation has been on the higher side across major economies including India. However, RBI anticipates a moderation in inflation in coming months and we expect RBI to pause the rate hike from the next policy review and have a gradual shift in stance to neutral.”

According to the CEO of Basic Home Loan Atul Monga, affordability is a major concern for home loan borrowers because of the continuous rise in interest rates.

With the cost of funding continuously going up, most banks and housing finance companies are expected to increase home loan rates, he said.

“If you have borrowed a home loan of Rs 30 lakh at 8.50 percent per annum for a tenure of 20 years and the interest is hiked to 8.75 percent, your EMI will go up approximately by Rs 476 from Rs 26,035 to Rs 26511,” Monga said.