Policy watchers, economists give mixed reactions to RBI hiking repo rate

The policy watchers and economists gave a mixed reaction to the Reserve Bank of India (RBI)’s announcement of hiking policy repo rate by 50 basis points (bps) to 4.90 per cent with immediate effect.

Mumbai, June 8: The policy watchers and economists gave a mixed reaction to the Reserve Bank of India (RBI)’s announcement of hiking policy repo rate by 50 basis points (bps) to 4.90 per cent with immediate effect, on Wednesday.

Abheek Barua, Chief Economist, HDFC Bank, said the monetary policy announcement is aggressive. And moves beyond just “frontloading” of interest rates increases.


‘The central bank seemed far more concerned about inflation. Reflected in its upward revision in its inflation forecast by 100bps to 6.7 per cent. And relatively more sanguine on domestic growth impulses. Clearly, the RBI is concerned about the broad-based nature of the increase in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level. Close to 6 per cent by fiscal year-end’. He said.

‘Bond yields saw an initial relief rally post the policy announcement. As the rate hike was broadly priced-in and the fear of a larger rate increase. Or a CRR hike has been alleviated. That said, with elevated oil prices and rising global yields. This rally is likely to be short-lived and yields could march north yet again,’ he added.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said. ‘The June policy was a continuation of the off-cycle policy. With the focus remaining squarely on inflation. The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate.’

‘We expect 35 bps repo rate hike in the August policy to 5.25 per cent. And repo rate at 5.75 per cent by end-FY2023. Along with pushing the repo rate to above the pre-pandemic level. A 35 bps hike would also signal a gradual normalization in the policy actions. While being adequately hawkish. We also expect another 50 bps hike in CRR to 5 per cent. By end-FY2023 to move the liquidity conditions towards the pre-pandemic levels”. He said.

Anjana Potti, Partner, J Sagar Associates (JSA) said. “With the retail inflation at 7.79 per cent for April 2022, highest since May, 2014. The recent statements from the Governor. And signals from other major central banks, the hike does not come as a surprise. The only question that remained was how much of an increase in the short term would address this.’

‘The RBI is fighting an uphill battle in the current geo-political situation to keep the inflation below the benchmark of 6 per cent, which it has missed for the past four quarters. We can expect further jumps in the next few quarters. The recent off-cycle hike has had an impact on the housing sector. Which had started picking up after two years of a lull. And this increase is going to dampen the spirits of homebuyers. The manufacturing sector will also see a pull back on the numbers as the retail purse strings tighten.’

‘An impact on the stock market is also inevitable. In May, after the surprise increase, the markets also saw a sharp downfall. With the BSE falling more than 1,400 points. And the NSE settling below 16,700, recording a fall of 391 points, leaving investors poorer by almost 6.27 lakh crores. However, one hopes that the investors are better prepared for the increase this time,” she said.

Shishir Baijal, Chairman and Managing Director, Knight Frank India, said the 50 bps increase in REPO rate will pinch homebuyers.

“A repo rate hike of 50 bps was imminent given the current inflationary trajectory and geopolitical concerns. Although the government has taken various measures to control domestic inflation. Such as food export restriction and cut in excise duty. Prolonged war and spike in global crude oil price is still worrisome. From a real estate perspective, home loans are set to get costlier. Banks have already raised the interest rate on home loan by 30-40bps since the earlier repo rate hike by the RBI in May and now with the repo rate cumulatively higher by 90 basis point there will be further increase in interest rate for homebuyers.’

‘Rising interest rate along with elevated property construction cost. And product price pressures could adversely impact on the real estate buyer’s sentiment. We hope that economic recovery and household income growth will serve. As a cushion for sustaining consumer demand in the face of this rate hike. Further, monetary policy tightening by central banks globally. And any resolution on the prolonged Russia – Ukraine war will bring price stability”. He said.