, in its third bi-monthly policy review, has hiked the key policy rates by 25bps with the reverse repo rate at 6.25%, repo at 6.50% and MSF at 6.75%, respectively.
This is how the industry reacted after RBI’s monetary policy outcome:
Rana Kapoor, MD & CEO at YES Bank
"The RBI rate hike is a rational response to the recent acceleration in inflation momentum, in my view. However, with peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, I expect a pause in the remainder of FY19. I foresee the RBI re-focusing on the growth-inflation mix, as the cumulative impact of 50bps of rate hike is assessed, amidst an uncertain global environment."
Sampath Reddy, CIO, Bajaj Allianz Life
“RBI hiked the policy rate but kept stance unchanged, as broadly expected by the markets. What has probably been read favorably by the market (and led to some respite in bond yields) is that CPI headline inflation forecast for H2 FY19 has hardly been changed from the earlier monetary policy (only revised upwards by 10 bps), despite the MSP hikes. However, the RBI maintained that uncertainty still remains on the inflation front and it needs to be monitored closely. We feel that future monetary policy action will continue to be data dependent.”
Comments of Dipali Gandhi, Head of Research, ASK Property Investment Advisors
Demand revival in real estate has been gradual despite interest rates being at near 8 year lows. This implies that macro-economic conditions and consequent income growth play a more influential role in driving residential real estate demand. Domestic macro growth indicators seem to be improving and would offset an increase of consecutive 25 bps to some extent. Moreover, during loan tenure of 15-20 years, the impact of movement in interest rates is minimal.
Rajiv Sabharwal, Managing Director & CEO, Tata Capital
“Concerns over increase in core inflation & depreciation in rupee coupled with global trade uncertainties and high oil prices have caused the RBI to go for consecutive increase in repo rate. The input costs for NBFC as a sector and the lending rates in general are expected to go up.”
Amit Saxena, MD & CEO, Unimoni India
“RBI Policy to allow co-origination of loans is a revolutionary step by that will enhance availability of much needed formal credit to priority sectors. Small businesses have historically been credit starved in spite of demonstrating excellent credit behaviour and possessing required assets for security.
NBFCs with their technology edge have been at the fore front of accessing and assessing under-served priority sector customers. A partnership with banks will greatly serve the cause of small businesses, which have been significantly contributing in employment generation and growth of consumer economy.
25bps increase is a welcome step by RBI to moderate inflation expectation in the economy, in line with trade conflicts & escalating food prices. Indian economy is well poised for growth with robust demands in exports, manufacturing and services sectors backed by high consumer sentiment - as evident in passenger & commercial vehicle sales.”
Naresh Takkar, MD & Group CEO, ICRA Ltd
"Given the persistence of various inflationary risks amid a near closing of the output gap, the Monetary Policy Committee (MPC) members chose 5:1 to raise the repo rate by 25 bps to 6.5% in the August 2018 policy, in line with our expectations.
Their anticipated decision to retain the stance of monetary policy at neutral instead of modifying it to withdrawal of accommodation, suggests that the future rate action would remain data dependant. Depending on the impact of various risks on the evolving inflation outlook, a final rate hike of 25bps may emerge towards the end of FY2019.
The maintenance of the neutral stance cooled bond yields after the policy announcement, as the rate hike itself was already priced in. Looking ahead, we expect the 10-year G-sec yield to trade in a range of 7.65%-8.0% in the remainder of this quarter. Greater clarity on MSPs, crude oil prices and other inflationary trends, fiscal risks and the Central and State Government borrowing programme for H2 FY2019, may emerge as triggers for a rise in bond yields. On the other hand, the announcements of additional open market operations by the RBI could help cap the G-sec yields."
Kumaresh Ramakrishnan, Head - Fixed Income, DHFL Pramerica Asset Managers Pvt. Ltd
“RBI at its bi monthly monetary policy meeting raised the key repo rate by 25 bps, in line with the market consensus. The rate hike decision was supported by a 5-1 vote amongst the MPC members even as the stance was unchanged at ‘neutral. Tone of the ensuing commentary was balanced and consistent with the stance.
RBI marginally upped the CPI target for October to March by 10 bps to 4.8 %. Importantly the RBI noted that the output gaps (slack capacity in the economy) has virtually closed, meaning that any pick-up in growth conditions is likely to lead to better pricing power leading to some pick-up in inflation.
Post today’s rate hike, it appears that the risks are almost evenly matched and the neutral stance continues to allow RBI to act decisively further on rates if needed. RBI also reiterated its long term goal of maintaining CPI at 4% on a durable basis, further signalling its intent to act quickly if needed.
We expect market yields to remain unaltered materially post the rate hike, given that the rate hike call was a market consensus and forward yield curves were already pricing in a rate hike”.
Karan Mehrishi, Lead Economist at Acuité Ratings and Research
"The 25 bps rate hike is in line with Acuite's expectations. Even though domestic factors such as rising core inflation, likely impact of farm MSP hikes and a depreciating currency are at play, we believe that MPC is also playing catch up with the normalization happening in the developed world. Today's meeting coincides with the US Federal Open Market Committee (FOMC) concluding remarks (due in a few hours) – which is expected to lose its accommodative stance, auguring more hikes. As a result, the US long term yields are already hitting the 3% mark. Maintenance of an attractive yield differential was therefore paramount for the MPC at this time".
Navneet Munot, CIO SBI Mutual Fund
"RBI raised the Repo rate by 25bps to 6.50%, making it the second hike this year. Elevated crude price, hardening of household inflation expectations, rising wage and input cost for businesses, risks of fiscal slippage guided the rate hike decision even as recent GST rate reduction and softening of commodity prices provides marginal comfort. The central bank refrained from conclusive comments on the inflationary impact of MSP hike as it depends on the final implementation strategy. It retained its optimism on growth. Despite advocating the neutral stance, we saw back to back hike in rate as monetary policy typically works with a lag of several quarters. To that extent, as the RBI stay firm on its 4% inflation target, it has chosen to be pre-emptive in rate hikes. From here on, we asses that the central bank should now pause for next two meetings and resume the rate hike (if any) only in the next year, after the trends in global commodity, MSP and fiscal has further evolved."
Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance Limited
“The MPC voted for raising interest rate by 25bps to 6.50% with 5-1 vote, the move was in line with market expectations. As we had expected, the policy guidance has been on a neutral side. RBI has maintained inflation expectations for full year to 4.75% and continues to see growth reviving to 7.4% sighting investment rate revival. The rate moves and inflation projection is largely due to volatile crude oil prices, higher credit off take and virtual closure of output gap as per the committee.
Even though MPC has factored in MSP related impact in 4.75% projection the rate change appears to be pre-emptive to compensate on larger impact on inflation. RBI governor also asserted that MPC targets headline inflation only and policy setting will operate to achieve 4% target in medium term.
From the bond market perspective, a neutral hike is a welcome development as it takes away uncertainties on terminal rate in near term, markets fear of tighter liquidity stance has also not materialized as RBI has committed to infuse liquidity when deficit is durable, in near term markets will be watchful of oil prices movement which are falling currently, near term range for bonds appears to be 7.60%-7.80%.”
Rajashree Nambiar, MD & CEO, Fullerton India Credit Company Limited
“The rate hike was consistent with the medium term inflation mandate and to that extent removes uncertainty from the markets. Having delivered two back-to-back rate hikes, RBI now has the flexibility to pause, be data dependent, review the progress of the monsoon and crude prices. In our view, this outcome combined with MPC’s neutral stance benefits retail borrowers and home buyers as interest rates are likely to remain stable for the foreseeable future.”
Khushru Jijina, MD, Piramal Capital & Piramal Housing Finance
"Today's Monetary Policy statement underlines confidence in a strong economic recovery amidst high geopolitical risks. The raise in the policy rates to 6.5% whilst maintaining a neutral stance by the RBI was a prudent move, especially as the output gap narrows with rising economic momentum. Tighter output gap can stoke core inflation thus pushing overall inflation beyond RBI's comfort range.
Additionally, we also view that the new policy allowing co-origination of loans for priority sector lending by Scheduled Commercial banks and NBFCs as a positive move to further enhance credit availability to small businesses as well as affordable housing. We eagerly await the detailed guidelines.”
Dr. Sunil Kumar Sinha, Prinicipal Economist, India Ratings and Research
“By hiking the policy rate by 25bp, RBI today reinforced the fact that inflation targeting is and would remain its primary objective and in the process it would not hesitate to act proactively. MPC chose not to wait for the data to clear up the haze that may have warranted pause for a while like (i) recent drop in crude oil prices (ii) reduction in the GST rate on a number of items (iii) good progress of monsoon so far etc. Clearly the sustained rise in core inflation over the past one year and the risks emanating from (i) rise in MSP for Kharif crops (ii) spurt in spending in an election year in India Ratings and Research’s (Ind-Ra) view pushed the RBI to go for a back to back 25bp hike in policy rate in the third bi-monthly policy review of 2018-19. RBI now expects the CPI inflation for 2HFY19 to be 4.8%, 10bp higher than earlier projection. However, by keeping monetary policy stance neutral, RBI has kept the window open to move the policy rate in future in either direction subject to data. With this rate hike Ind-Ra believes it is unlikely that there would any more hike in FY19. “
Yogesh Jain, Chief Treasury Officer, AU Small Finance Bank
“The RBI has raised policy rates citing inflationary concerns and a decent growth recovery. The increase in agriculture income, buoyant rural demand, strengthening industrial growth and robust commercial and passenger vehicle sales growth highlighted by RBI report are a positive signal for the economy and our banking business as well.”
Surendra Hiranandani, Chairman & Managing Director, House of Hiranandani
The rate hike of 25 bps was on expected lines, but it is surprising that this is the second hike implemented by the Central Bank despite maintaining “neutral” stance. Inflation is expected to trend upwards and might surprise in the second half of the year owing to increase in MSP and higher government spending.
The hike will certainly impact credit growth and further delay the revival of the real estate sector. Construction activity had started to pick up slowly post the implementation of policy reforms, but the rise will hurt consumer sentiment. The sector was looking for some encouragement that would move the needle towards accelerated growth post RERA & GST. Interest rates and regulation will decide the long term success of the real estate sector in India.
Thukral, MD & CEO, Axis Securities
“On expected lines, RBI has hiked repo rate by 25 bps to 6.5%, even as the tone remains neutral. The upward revision in inflation projections to 4.8% (2nd half FY19) and 5% (Q1FY20) gives sense that RBI is being vigilant of the inflationary pressure coming from staggered impact of HRA revision by state governments, volatility in global financial markets due to trade wars, rising crude prices resulting in fiscal slippages and uncertainty over impact of MSP on food prices. This signals the hardening of interest rates in near to midterm.”