India raises key interest rate by 50 basis points

The Reserve Bank of India's benchmark repo rate was raised by 50 basis points on Friday, the fourth straight increase in the current cycle, as policymakers extended their battle to tame stubbornly above-target retail inflation rate.

The monetary policy committee (MPC), comprising of three members from the RBI and three external members, raised the key lending rate or the repo rate (INREPO=ECI) to 5.90 per cent with a five out of six majority.

The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 5.65 per cent and 6.15 per cent, respectively.

India's annual retail inflation rate accelerated to 7 per cent in August, driven by a surge in food prices, and has stayed above the RBI's mandated 2-6 per cent target band for eight consecutive months.

"Repo policy rate hike of 50 bps is in line with our expectations."

"Given the global adverse conditions, we remain wary on the pressure on (the) INR and hence the need for continued rate hikes."

"We expect the MPC to hike 35 bps in the December policy. However, with inflation expected to fall within 6 per cent threshold in 4QFY23, we expect the MPC to probably pause and assess the lagged impact of monetary tightening."

"This conscious front-loading could give them some breather next year on shallow hikes ahead.

With inflation likely to be largely in line with RBI's estimates, the hike will make the ex-post forward real repo rate positive, albeit still lower than the RBI's estimated real neutral rate of 0.8-1 per cent."

"At this point, we still think that the RBI would not go too restrictive and terminal rate could hover near the estimated real rates, implying not more than 100 bps hikes ahead, including today's decision. However, the extent of global disruption will remain key to the RBI's reaction function ahead."

"Compelled by the global monetary tightening cycle and in a bit to rein in inflationary pressures, MPC announced repo rate hike by 50 bps. Going forward, the domestic policy may continue to be driven by the global monetary tightening cycle and aggressive stance of (US) Federal Reserve reducing our degrees of freedom."

"Assuming Fed funds rate of 4.4 per cent by December 2022, we may see at least another 50 bps hike in remaining part of the current financial year, despite recent correction in commodity prices offering tailwinds."

"The RBI raised the policy rate by 50 bps to 5.9 per cent as expected, aligning itself to aggressive monetary tightening globally. Moreover, the rate move was in response to continued inflationary risks and growth that broadly continues to hold up. We expect repo rate to be raised to 6.5 per cent in this cycle."

"The central bank kept its stance unchanged at 'withdrawal of accommodation,' justifying this stance as adequate, as the policy rate adjusted for inflation still trails behind 2019 levels."

"On the rupee, as argued by us before, the RBI said that their strategy would be focussed on maintaining investor confidence and anchoring expectations, signalling that FX interventions are likely to continue to defend any extreme volatility in the rupee."

"Fed's 'whatever it takes' hawkish forward guidance and sharply dropping INR left RBI with no other choice but to opt for another 50 bps rate hike as we expected. Despite a rather aggressive intervention (central bank used up $100 billion reserves) to stabilise the currency failing to do the needful, frontloaded rate hike was the need of the hour and RBI obliged."

"That said, we believe that the RBI may not be too far from bringing the rate hike cycle to an end as, unlike the Fed, it is not in a position to engineer a recession to contain inflation given the weak labour market recovery and elevated unemployment rate."

"The RBI MPC's hawkish policy squares with shifting uncertainties, which leaves the door open for further hikes in rest of fiscal year. Notwithstanding the modest cut in the full-year growth projection, commentary underscored the MPC's confidence on recovery dynamics, which provides the elbow room to stay focused on price stability."

"Policymakers signalled that the correction in the rupee was driven primarily due to global volatility and a bid greenback, attributing about two-thirds of the fall in FX reserves due to valuation effects. We expect intervention efforts to continue but stay opportunistic."

"It's heartening to see that the monetary policy unveiled today has responded to the domestic growth-inflation mix in the most optimum fashion. By lowering the growth forecast and keeping unchanged the inflation forecast, the RBI has given a clear message that growth concerns outweigh inflation concerns."

"While there was no alternative to raising the Repo rate by 50 bps, given the global wave of tightening and the pressure on our currency, by keeping the liquidity stance unchanged, the MPC has assured of accommodation as and when needed by the productive sectors. The policy is certainly bond positive. Today's policy action combined with the fact that the government has cut its borrowing target for FY23 by 100 billion Indian rupees ($1.23 billion), is extremely positive for the bond markets."

"The fact that the central bank is squarely focussed on inflation should provide succour to capital markets looking to India as a safe house. The government marginally lowering its total borrowing yesterday is a complimentary act."

"The market was positioned for peak policy rate near 6 per cent, today's 50 bps hike will raise expectations that the peak policy rate is higher than earlier believed. We see peak policy rate at 6.5 per cent now, so plus 60 bps from here. But we are cognizant that if the government does not use tax/trade policies to curtail import demand, the burden on RBI to do the heavy lifting will increase."

"The 50 bps hike in repo rate was in line with our expectations though we had expected a slightly more hawkish tone to the policy communication. We see the tone as more neutral and the RBI seems to be confident of balancing out the external as well as domestic risks. Stance of liquidity withdrawal was also unchanged."

"We believe that durable liquidity will move towards neutral by end-FY2023. Overall, we believe the RBI will be more data dependant from here on. We continue to expect another 35 bps hike in December followed by a pause with the RBI assessing Fed actions, and impact of past rate hikes on domestic growth and inflation."

"The impact of external monetary tightening measures and its spillover effects have been evident in the policy stance and action today. To the extent that these factors prevail over the coming months, the terminal policy rate expectation locally could reset a bit higher. However, the overall focus on moderating surplus liquidity and adjusting policy rates to ensure real positive rates remains positive from a medium-term perspective."

"While the RBI has hiked rates by 50 bps, the stance still remains at the removal of accommodation. The RBI has acknowledged that the policy is still accommodative. Rates would have to be hiked more to reach a neutral situation. Bond markets had already built in the 50 bps hike and are likely to remain range-bound. In the medium term, inflation is likely to keep rates high."

"Markets were largely expecting the RBI's 50 bps rate hike today due to a troika of factors – sticky, above-target inflation, stable growth prospects, and currency depreciation triggered by expectations of further frontloaded rate hikes by developed markets' central banks."

"The relatively unchanged growth and inflation outlook by the RBI indicates that the policy arithmetic hasn't materially changed for it, and the reluctance to change stance from 'withdrawal of accommodation' indicates that more monetary policy tightening is likely to be in the pipeline."

"It is important that the RBI reminded that true interest rate defence of the currency doesn't necessarily comes not from hiking policy rates in response to depreciation, but by adhering to the flexible inflation targeting framework, thereby ensuring macroeconomic stability."

"The hike in policy rates of 50 basis points was largely on expected lines. The RBI maintaining stance of withdrawal of accommodation was the need of the hour following the rise in domestic inflation (CPI) that has hovered above the threshold level of tolerance as well as the aggressive monetary tightening across the globe."

"However, the VRRR 28-days merger into 14-day and the RBI reiterating its intention to monitor liquidity situation, is a welcome move."

"With this rate hike they have further closed the gap between inflation and interest rates, which currently stands at 7 per cent."

"We are in a much better position compared to all the other major global economies, which are still struggling with high inflation and falling behind the curve. With the gap between our inflation and interest rates narrowing, we expect the quantum and speed of rate hikes to reduce going forward."