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Friday, May 20, 2022

RBI hikes repo rate by 40 bps: Here’s how market analysts, economists, experts reacted

The sudden hike in RBI's key interest rates led to a sharp reaction in the domestic stock market where the S&P BSE Sensex crashed 1,306.96 points (2.29 per cent) to end at 55,669.03 while the Nifty 50 fell to 391.50 points (2.29 per cent) to settle at 16,677.60.

By: Express Web Desk | New Delhi |
Updated: May 4, 2022 5:30:50 pm
Shaktikanta Das Governor, Reserve Bank of India (File)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in a sudden move on Wednesday hiked the policy repo rate by 40 basis points (bps) to 4.40 per cent with immediate effect. Consequently, the standing deposit facility (SDF) rate too was adjusted to 4.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent. The sudden move by the central bank was taken in an off-cycle meeting of the MPC in a bid to contain inflation, which has remained above the RBI’s target of 6 per cent for the past three months.

The sudden hike in RBI’s key interest rates led to a sharp reaction in the domestic stock market where the S&P BSE Sensex crashed 1,306.96 points (2.29 per cent) to end at 55,669.03 while the Nifty 50 fell to 391.50 points (2.29 per cent) to settle at 16,677.60. All the sectoral indices ended with sharp cuts especially the rate sensitive sectors – banks, realty and automobiles. The Nifty Realty index fell 3.27 per cent, the Nifty Auto declined 2.54 per cent and the key Bank Nifty slumped 2.49 per cent on Wednesday.

Here’s how market analysts, economists and experts reacted to RBI’s sudden rate hike:

Dhiraj Relli, MD & CEO at HDFC Securities said, “In a surprise meeting today, RBI announced a repo rate hike by 40 bps (to 4.4%) and an increase in the CRR rate by 50 bps. RBI is no longer behind the curve to react to rising inflation numbers. In terms of timing, it took everyone by surprise and the hike of 40 bps is higher than the market expectation of 25 bps in the June Meet. This apart, the increase in CRR by 50 bps will withdraw Rs 87,000cr liquidity in the system. Immediately on the announcement, all interest-rate sensitive stocks fell sharply including Banks, Auto, Real estate, etc. Coming ahead of the US Fed announcement due today, the RBI has taken the lead for the time being after being blamed for being behind the curve by some economists. Nifty could remain under pressure for some time.”

Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers said, “The surprise mid-cycle rate hike by the RBI is driven by factors such as inflation concern (Mar’22 inflation nearly 100 bps higher than expected and another surprise high inflation rate now expected in Apr’22), the perception that the RBI is falling behind the curve, external sector pressures (capital outflow, higher trade deficit, weaker rupee) and the likelihood of 50 bps rate hike by the Fed. By setting the interest rate on the newly introduced SDF rate at 40 bps higher than the reverse-repo rate, the RBI effectively increased the policy rate by 40 bps in the April’22 policy. Today’s rate hike makes the effective rate higher by 80 bps. The simultaneous 50 bps CRR hike would tighten liquidity (By Rs.90,000 crore immediately), which would improve the transmission of rate hike in credit and debt market. We expect immediate increase in money market rate, some transmission in the long-term bond market and also credit market (both lending and deposit rates). The impact on the equity market is likely to be negative in the short-term.”

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Pradeep Multani, President at PHD Chamber of Commerce and Industry said, “Though RBI’s step is considered to address the inflationary pressure, 40 bps hike in the repo rate and 50 bps hike in Cash Reserve Ratio (CRR) will hurt the consumer and business sentiments. The economy is still recovering from the pandemic impact of Coronavirus, yet there are worries from geopolitical developments, such as likely contagious impact on trade and finance.”

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “The MPC’s decision, in an unscheduled meeting, to raise the repo rate by 40 bp and CRR by 50 bp is a surprise since it came on the LIC IPO opening date. MPC’s proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired. The above 1000-point crash in Sensex has soured the sentiments on the opening day of India’s largest IPO. The 10-year bond yield has spiked to above 7.39% indicating an imminent rise in the cost of funds”

Adhil Shetty, CEO at said, “The latest RBI’s move to increase the repo rate may come across as hard but not unexpected as the inflation numbers were rising due to the third wave of the pandemic as well as the Russia-Ukraine war. The impact of the rate hike would be felt across all categories of loans, both secured and unsecured. A 40 bps will pinch the borrowers who will shell out more now for the equated monthly installments (EMIs). According to experts, close to 40% of loans are linked to the external benchmark, and this increase will translate into a more expensive loan for new and existing borrowers alike in a very short time. The existing borrowers will see their tenor go up. A home loan borrower with an outstanding principal of Rs.50L and tenor of 20 years at 7% interest could see their tenor extend by approximately 18 months when interest moves up to 7.4%. Borrowers who have taken MCLR-linked loans will also feel the pressure, though it may take a little longer until the borrowers’ loan reset before the new rates come into play for individual borrowers.”

Ramani Sastri, Chairman & MD at Sterling Developers said, “The increase in repo rate will likely have an impact on the industry as residential demand has been positively revived in the post-pandemic context and needs to be fostered. It also goes without saying that the real estate industry’s perennial hope is fixed on lower interest rates as it improves affordability and also provides the required fuel for the growth of the economy along with the real estate sector, which is allied with several other industries. We remain positive and hope that the government continues to provide the required support that the industry requires.”

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