Many were of the expectation that RBI would leave the interest rates unchanged due to the fact that the high interest is slowing down the economy but as inflation is not showing any sign of coming down, RBI was left with no option other than to raise the interest rates.
"The RBI’s move to hike interest rates by 25 basis points will further slow down fresh investments and industrial growth", Industry Body Assocham said. Mr D.S. Rawat, Secretary General of The Associated Chambers of Commerce and Industry of India (Assocham) said, "Successive rate increases by the Central Bank since March 2010 have not been able to control inflation which at 13-month high is currently hovering close to double digits. High input costs amid global economic uncertainties especially in the Euro-zone are adding to negative sentiments. Global commodity and oil prices have remained elevated due to easy monetary policies of developed nations that boosted liquidity in global markets. All these factors in a high interest rate environment will most certainly put brakes on new investments and put corporate India in a difficult position to maintain the growth momentum. The national economy seems poised for a downward swing".
Experts were also expecting that this would be the last rate hike from the Central Bank but that may not be the case. RBI said it would continue with its anti-inflationary stance as inflation is much above the comfort zone. Even global economic environment has worsened, it said.
RBI has said that the future actions would be guided by the inflationary pressures. Against the backdrop of recent increase in petrol prices and firmness in crude prices as they are still hovering around $ 110/ barrel, it is looking that headline inflation would not come down in the next few months. Therefore it looks that there is a chance that RBI may hike the rate again in the next meeting. Even it may be that the Banks may not adjust the deposit and lending rates this time as per the RBI directives as the credit off-take in this fiscal so far is quite low implying that Banks are finding few borrowers at the higher rates. We are walking through a situation where interest rates and inflation are at both historical high and growth is showing signs of moderation. The recent increase is petrol price is likely to inch up by headline inflation close to 6 bps. With rupee depreciation, Oil marketing companies under recoveries are expected to rise by around ` 9,000 crore. As a matter of fact they have already lost around ` 65,000 crore in the first half of fiscal and are expected to loose around ` 1,21,000 crore for the full fiscal considering the cruse prices at $ 110/barrel on account of under-recoveries on selling diesel, domestic LPG and kerosene below cost. The rising rupee is putting pressure on the importers as it has depreciated remarkably as a result of widening trade deficit.
Experts reactions on RBI Monetary Policy:
ECONOMISTS:
Tushar Poddar, Economist, Goldman Sachs
The Reserve Bank of India (RBI) hiked the repo rate by 25 bps, in line with the Bloomberg consensus expectation, while we were expecting a pause. Our assessment of the rate hike is that it was unnecessary given the sharp deterioration in the global environment and a significant slowdown in domestic activity. We think that inertia in policy-making-once the Central Bank is on a tightening cycle, it is difficult for it to stop, was probably responsible for this hike. We believe the impact of this hike will be felt only after a 2-3 quarter lag, by which time growth and inflation will have slowed considerably, and this may serve to exacerbate the downturn. We do not think that banks will raise lending and deposit rates as a result, as the credit-deposit ratio has continued to fall. The RBI has left the door open for future rate hikes, as expected. We did not think that the RBI would give a dovish statement, but make future action dependent on data. Though another rate hike cannot be ruled out, we think that the underlying slowdown in momentum in the economy, weakening inflationary pressures, and global headwinds make the bar for another hike high. We continue to expect 100 bps of rate cuts in FY13.
The Reserve Bank of India (RBI) hiked the repo rate by 25 bps, in line with the Bloomberg consensus expectation, while we were expecting a pause. Our assessment of the rate hike is that it was unnecessary given the sharp deterioration in the global environment and a significant slowdown in domestic activity. We think that inertia in policy-making-once the Central Bank is on a tightening cycle, it is difficult for it to stop, was probably responsible for this hike. We believe the impact of this hike will be felt only after a 2-3 quarter lag, by which time growth and inflation will have slowed considerably, and this may serve to exacerbate the downturn. We do not think that banks will raise lending and deposit rates as a result, as the credit-deposit ratio has continued to fall. The RBI has left the door open for future rate hikes, as expected. We did not think that the RBI would give a dovish statement, but make future action dependent on data. Though another rate hike cannot be ruled out, we think that the underlying slowdown in momentum in the economy, weakening inflationary pressures, and global headwinds make the bar for another hike high. We continue to expect 100 bps of rate cuts in FY13.
Rohini Malkani, Economist, Citi India
While today's 25 bps hike in rates was in line with expectations...two key take-away from the RBI's policy are (1) Caution on downside risks to growth estimates and (2) Worries that a premature change in the policy stance could harden inflationary expectations. Going forward, on rates, given the deterioration in both global and domestic macro, odds favor a pause but Reserve Bank's concerns on elevated inflation do keep the window open for further rate actions.
While today's 25 bps hike in rates was in line with expectations...two key take-away from the RBI's policy are (1) Caution on downside risks to growth estimates and (2) Worries that a premature change in the policy stance could harden inflationary expectations. Going forward, on rates, given the deterioration in both global and domestic macro, odds favor a pause but Reserve Bank's concerns on elevated inflation do keep the window open for further rate actions.
Dr. Arun Singh, Senior Economist, Dun & Bradstreet India
The RBI's hawkish stance in the monetary policy reflects the fact that the prevailing inflationary pressures continue to pose a significant risk for overall growth story. Given the persistence of non-food manufactured products at a very high uncomfortable levels, the hike in interest rates at this stage was very much expected. However, the point of concern is despite the successive policy rate hikes, the transmission of the monetary policy signal has not been fully effective. With the renewed upward pressures emanating from the food prices and hike in petrol prices, RBI is expected not to pause and continue with another round of a 25 bps rate hike in the upcoming policy review.
The RBI's hawkish stance in the monetary policy reflects the fact that the prevailing inflationary pressures continue to pose a significant risk for overall growth story. Given the persistence of non-food manufactured products at a very high uncomfortable levels, the hike in interest rates at this stage was very much expected. However, the point of concern is despite the successive policy rate hikes, the transmission of the monetary policy signal has not been fully effective. With the renewed upward pressures emanating from the food prices and hike in petrol prices, RBI is expected not to pause and continue with another round of a 25 bps rate hike in the upcoming policy review.
Indranil Pan, Chief Economist, Kotak Mahindra Bank
The RBI continues to stay hawkish on inflation with a close to 10% reading on the Headline WPI inflation and a continuously firming non-food manufactured goods inflation. Any change in stance could have led to a dilution of the impact of past policy changes. Even while the RBI continues to stay hawkish on inflation, it is looking to prepare the market for a pause, assuming that there are no negative surprises on inflation going forward. It has indicated that the impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory. We now look for the RBI to pause and factor in the impact of the previous rate increases on the real sector of the economy, as RBI also indicates that the risks to its growth projections made in the July review are on the downside.
FUND MANAGERS:
Navneet Munot, Chief Investment Officer, SBI Mutual Fund
In line with market expectations, RBI increased repo rate by 25 bps to 8.25% in its mid-quarter monetary policy review today. While acknowledging global uncertainties and domestic demand slowdown, RBI has continued with its anti-inflationary stance to ensure inflationary expectations are well anchored. Lagged effect of past actions and global environment would moderate the domestic demand and inflation trajectory going forward, in our view. Our sense is that RBI is likely to take a pause after today's rate action. This should be viewed positively by bond and equity markets. We expect bond market to remain range bound with a downward bias in yields over the next couple of months. Sentiments in equity markets should improve on evident signs of peaking of rate cycle. Markets would closely watch global developments and movement in commodity prices.
Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance
The increase in repo rate by 25 bps each is largely in line with the market expectation. There has been an effective increase of 500bps from a low of 3.25% (reverse repo rate) in Q1 of CY10 to the current repo rate of 8.25% (current operative rate). The RBI has chosen inflation control as its main focus at this point of time and will watch the impact of rate increases on the inflation trajectory and implications of global developments to change its course. Inflation remains generalized across food, non-food manufacturing and imported inflation based on firm crude oil prices. Form a debt market perspective the overhang of supply and probable slippages in the fiscal deficit numbers are in consideration as also growth which can impact long term interest rates. If the fiscal deficit numbers can be managed around the budgeted level it can get a surprise to the market but on the back of volatile commodity prices and under provision of subsidies the probability of this surprise is limited. The equity markets have largely discounted the higher inflation/interest rate environment and lesser growth relative to the previous year.Moderation in earnings for FY12/FY13 is also being discussed. The government focusing back on some of the reforms process can get interest back in the market. Global uncertainty and continued lack of movement on the development front locally can lead to corrections.
Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance Co.
High inflation is certainly a risk for the economy but to manage inflation is not the sole responsibility of the RBI through the monetary policy.Today, the Monetary Policy is the sole instrument used to control inflation. Rise in petrol prices would further add to inflation and if inflation is the only objective and monetary policy is the only tool then, RBI would remain hawkish for some more time. High interest rates would certainly derail growth. Turmoil in global markets would add fuel to fire. Besides this, role of the central bank is also to manage growth and employment. Hence, the fiscal policy and supply side issues on one side and global commodities prices on other side have to be considered and appropriate policy response needs to be evolved accordingly. Past rate increases have yet not been fully transmitted in economy and we are already seeing retardation in IIP and GDP growth. It's time for some fresh thinking from the Government to take other measures to control inflation. As rising interest rates would have a larger impact on consumption and lead to delay in fresh capacity creation.
Ramanathan K, Chief Investment Officer - Single Manager, ING Investment Management
The 25 bps increase in rates is in line with expectations. There was an expectation that given the global uncertainties as well as slowing down of domestic growth RBI would sound less hawkish on inflation. However this was not the case. Inflation continues to be the primary driver for monetary policy. I still feel that we are at the end of the monetary tightening cycle. Inflation should head southwards starting end of third quarter of this financial year driven mainly by base effect.
Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance
RBI maintains an anti inflationary stance though it recognizes that over the past few weeks the developments in the global scenario remains a serious concern which would lead to slowdown in domestic growth. We think that this is the last of the rate hikes, but RBI has kept its options open and stated that premature change in policy stance may harden Inflationary expectations. Further rate actions would depend on the downward movement of inflation trajectory. We expect the 10 year Government security yield to move in a range of 8.20% to 8.40%.
RBI maintains an anti inflationary stance though it recognizes that over the past few weeks the developments in the global scenario remains a serious concern which would lead to slowdown in domestic growth. We think that this is the last of the rate hikes, but RBI has kept its options open and stated that premature change in policy stance may harden Inflationary expectations. Further rate actions would depend on the downward movement of inflation trajectory. We expect the 10 year Government security yield to move in a range of 8.20% to 8.40%.
BROKERS:
ICICI Securities
Banks have transmitted the rate hikes in the near past as the modal base rate rose from 10.25% in July to 10.75% in August. However, the full impact of initial rate hikes is expected to be felt faster now due to the lag. This should tone down demand side inflation gradually. With a slowdown setting in and GDP growth expected to be at ~7.5%, we believe incremental NPA pressure will remain high for the banks. We expect rate hikes to have peaked. However, higher interest rates are likely to stay in the system for a fair amount of time leading to the banking sector facing either credit contraction or increased defaults or both. We continue to prefer banks with strong liability franchise and strong asset quality like HDFC Bank from the private banking space and Bank of Baroda from the PSB space.
Amisha Vora, Joint Managing Director, Prabhudas Lilladher Group
The 25 bps hike in repo rates was widely expected a majority of market players. We feel while currently markets are participating with the strong statements from European leaders, reality back home remains extremely challenging and we see markets broadly peaking out current rally close to 5250 nifty levels and remaining in the range of 4750 to 5300 for some more time.
Dipen Shah, Head - Fundamental Research, Kotak Securities
The monetary policy is exactly in line with our expectations. The commentary is suggesting that, while the RBI has moderated its stance from the previous policy, it has not indicated that rate hikes will stop. The markets were volatile around this important, as always, but remained range bound and also maintained the gains of the previous couple of sessions. Over the next few days, markets will continuously watch the developments in Europe and also in US, where the Federal Reserve meeting will be very important. Crude prices have remained buoyant, which is a point of concern. Any developments on the reforms front will be a positive for the markets. We continue to recommend a stock specific approach with a medium - to - long term perspective.
Kislay Kanth, Senior Director, Research, Mape Securities
We are moderately negative on the fact that the RBI opted to increase the repo rate again by 25bps to 8.25%. Impact of this 12th rate increase since last year beginning will be in further reduction of the economic growth expectations and lowering of corporate earnings estimates by analysts in India. Hence the upside in the markets will stay capped, which are also vulnerable to global market volatility staying high. Our stance on banks is still neutral, but we prefer a few select banks on asset quality. Our recent initiation report highlights the strengths of BoB and PNB as stronger banks at attractive valuation. They will stay as our main recommendation. We believe some pressure to come on auto companies due to the rate increases and property and infrastructure/capital goods sector to stay depressed. Exporting sectors can benefit from the fall in INR value, although it should be relatively a transient gain.
Barclays Capital
Subsequent RBI action will depend upon a host of 'known unknowns' - further developments in domestic growth and inflation dynamics, developments in the global financial situation, and international commodity price movements to mention a few. At the moment, we do not revise our existing baseline scenario of the RBI staying on hold from the October meeting onwards, particularly due to the rapid unfolding of the global uncertainties. However, the central bank`s clear reiteration of its anti-inflation bias leaves the door open for another hike at the October policy meeting, if the central bank feels it is needed. The RBI seems to be ready to alter its policy stance only when it sees indications of a softening in the inflation trajectory, which is unlikely to take place by October and possibly will be visible only by December. We will revisit our existing baseline scenario in the subsequent weeks. But, today's policy statement, in our view, has added an element of upside risk to the policy rate outcome in late-October, barring any further deterioration in global financial stability.
Shanu Goel, Senior Research Analyst, Bonanza
RBI raised the repo rate and reverse repo rate by 25 basis points, in line with the market expectations. RBI in clear words pointed out that with the likelihood of inflation remaining high for the next few months, it is imperative to continue with the anti-inflationary stance. Going forward, RBI will change its hawkish stance or its stance will be influenced clearly by signs of downward movement in the inflation trajectory. RBI has emphasized yet again that it remains committed to reduce inflationary pressure at the expense of some growth in the economy. The affect on growth of earlier policy actions have been reflected in lower IIP data in recent months and it will be keenly watched how far RBI will maintain its hawkish stance.
D K Aggarwal, Chairman & Managing Director, SMC Investments and Advisors
As per our expectations RBI has increased the Repo rate by 25 bps to 8.25%, the twelfth increase so far. Indicating to continue with the current stance, RBI has said that the future actions would be guide by the inflationary pressures. Against the backdrop of recent increase in petrol prices and firmness in crude prices as they are still hovering around USD 110/ barrel, it is looking that headline inflation would not come down in the next few months. Therefore it looks that there is a chance that RBI may hike the rate again in the next meeting. We think that banks may not adjust the deposit and lending rates this time as per the RBI directives as the credit off take in this fiscal so far is quite low implying that banks are finding few borrowers at the higher rates. We are walking from a situation where interest rates and inflation are at both historical high and growth is showing signs of moderation.
Sailav Kaji, Director, Institutional Equities & Chief Strategist, Padmakshi Financial Services
RBI policy stance is in continuation of their fight against inflation. We believe inflation cycle barring for another fuel price hike has peaked out and will get reflected from November-December onwards. Rates too in that scenario has peaked out.
LENDERS:
Rajrishi Singhal, Head, Policy & Research, Dhanlaxmi Bank
RBI's rate hike of 25bps is in line with our expectations. Given the likely downgrade of growth target, and RBI's assertion that its monetary policy is working, suggests that RBI will continue with its anti-inflationary stance by tightening interest rates. However, RBI's stance seems much less hawkish in this monetary policy. We expect that RBI will start weighing the weakening global demand scenario, and the weakening demand pressures in the domestic economy, increasingly in coming monetary policy meetings as inflation is likely to remain high and at elevated levels till the end of FY12.
Moses Harding, Head, Global Markets Group, IndusInd Bank
Three was clear case for 25 bps rate hike in line with RBI's stance of considering inflation as major risk to growth. The sudden development in the external sector of addressing the dollar scarcity through concerted action by all major central banks gave good comfort. The immediate impact is reversal of bearish set up in currency market and making policy transmission more effective. It also brings in confidence of joint action by the Western economies to stop importing woes into the East and emerging markets. The support from emerging markets is essential to get the West out of the woods. RBI's action of effecting 25 bps rate hike reinforces its priority on bridging the huge negative gap between growth and inflation. It is possible that the impact and policy transmission will be more effective when there is dilution in the import content on inflationary pressure. The recent development in the external sector led by ECB also provides confidence on expectation of RBI shifting into pause mode. It is possible that we have seen the rate hike for the last time. The expectation on the way forward is for RBI to maintain Repo rate as operative policy rate till December 2011; shift policy rate to Reverse Repo rate by January 2012 and prepare for rate cut in Q1 of FY13. This stance will result in bridging the negative gap between growth and inflation and provide consolidation around 8% (both on growth and inflation) on shift into new financial year.
Shachindra Nath, Group CEO, Religare Enterprises
The rate hike is line with expectations and we believe that it stems from the intent to preserve the central banks anti inflationary stance. No real surprises and we believe that we would continue to live in a high interest rate regime. From our stand point we operate a NBFC business within the group and we will appropriately, as we have done before, pass on the rate hike.
Hemant Kanoria, Chairman and Managing Director, Srei Infrastructure Finance
We sincerely hope this is the end of the rate hike cycle. We have to realize that monetary policy has its limitations in terms of containing inflation when many of the factors fueling this inflation are supply-side constraints. There is an urgent need for fiscal measures to address these issues by scaling up capacity in infrastructure sectors. But if rates keep on increasing, it will adversely impact investments in infrastructure. We welcome the steps announced by Government in liberalizing the external commercial borrowings window for infrastructure investment. After today's hike, RBI may pause for sometime before reversing the cycle. The impact of the rate hikes are usually felt with a time lag. Thus the cumulative impact of the rate hikes will be felt for quite some time to come. It is easier a pull a string, but difficult to push it. Even when RBI reverses the cycle, the appetite for fresh investments will take some time to return. Till then we will have to settle for a moderation in GDP growth.
REALTORS:
Pradeep Jain, Chairman, Parsvnath Developers
While general sentiments in India are that with festive season people tend to go for buying decisions and as far as real estate is concerned we see good buying in the festive season but these rate hikes have made cost of funds expensive for both developers and buyers, and we may not see the buying spree in the coming festive season. Not only this, constant increases in the input costs is also making the business environment very complex across industries. As real estate developer, we are not left with any choice but to pass on the same to our buyers resulting increase in property prices. Hereby, we request RBI not to increase the rate to any further extent; instead we appeal to RBI to stimulate measures for an improved supply chain management.
Saumil Daru, Group CFO, Oberoi Realty
Talking about Mumbai as a market, we do not expect any immediate impact on the realty sector, as the banks have already increased their interest rates significantly post the hikes in the recent past. However we will have to wait and watch if the banks pass on the hike to the industry.
INDUSTRY:
Harsh Pati Singhania, MD, JK Paper
Industry is disappointed that RBI hiked Repo rate by 25 basis points again (12th hike in 18 months) to 8.25% in its Mid-Quarter review, despite clear signs of slow down. Business & Industry is already adversely impacted by this slow down and prevailing high interest rates. Any additional rise in Bank's lending rates will lead to further slow down and deferment of much needed investments for growth of the economy. I don't believe that increase in policy rates will resolve the inflation problem.
Industry is disappointed that RBI hiked Repo rate by 25 basis points again (12th hike in 18 months) to 8.25% in its Mid-Quarter review, despite clear signs of slow down. Business & Industry is already adversely impacted by this slow down and prevailing high interest rates. Any additional rise in Bank's lending rates will lead to further slow down and deferment of much needed investments for growth of the economy. I don't believe that increase in policy rates will resolve the inflation problem.
RBI perhaps should reconsider its hawkish stand and look for some other alternatives/tools to tackle the dilemma of taming inflation without hurting growth in October RBI meet. It is also time to look at fiscal policy solutions rather than rely on monetary policy alone.
(courtesy: Bloomberg, Moneycontrol, myiris etc. - consolidated)
