The RBI on Tuesday hiked short-term lending and borrowing rates sharply by 50 basis points for the third time in three months to tame high inflation, a move that would make all personal and corporate loans more expensive. It raised repo and reverse repo rates to 8% and 7% respectively.
Reactions from experts on how the rate hike will impact economy and their expectations going ahead.
View from Economists
Rohini Malkani, Economist, Citi India:
In a bid to tackle the persistence of 9%+ inflation, the RBI surprised the market by raising rates by 50 bps taking the repo to 8%. Bond yields edged up over 10bps with the 10 year currently trading at 8.33%. With inflation likely to remain elevated at 9%+ and even touch double-digit levels on revisions in the coming months, we expect the RBI to elongate its tightening cycle by a further nearly 50 bps by December. While maintaining its 8% GDP estimate, the RBI has raised its March 12 inflation estimate to 7% from 6%. This remains lower than our estimate of 8%. With banks immediately passing on the rate hike, we see further downside risks to our 8.1% GDP estimate.
In a bid to tackle the persistence of 9%+ inflation, the RBI surprised the market by raising rates by 50 bps taking the repo to 8%. Bond yields edged up over 10bps with the 10 year currently trading at 8.33%. With inflation likely to remain elevated at 9%+ and even touch double-digit levels on revisions in the coming months, we expect the RBI to elongate its tightening cycle by a further nearly 50 bps by December. While maintaining its 8% GDP estimate, the RBI has raised its March 12 inflation estimate to 7% from 6%. This remains lower than our estimate of 8%. With banks immediately passing on the rate hike, we see further downside risks to our 8.1% GDP estimate.
Arun Singh, Senior Economist, D&B India:
"With the higher than expected hike in repo rate, the likelihood of pause for rate hike has increased significantly. Persistence of inflation way above the comfort levels in domestic market, recent developments in global economy and volatile commodity prices might have played a major role in policy decision. Going ahead, such high interest rates would not only help in tempering inflation expectations but would also curb the demand side pressures especially, investment demand. In such a scenario, the consequent moderation in the investment activity might restrain the GDP growth during the year. Considering another rate hike by 50 bps in coming months, GDP growth might slip to sub-eight percent during FY12. Further, given the significant increase in policy rate, the gap between the deposit and the credit growth would continue to remain constricted in the short to medium term".
Ashutosh Datar, Economist, IIFL:
We expect another 25 bps rate hike and a pause thereafter to gauge the evolving growth-inflationary dynamic; however policy easing is not on the cards yet. While, inflation will ease in 2HFY12, in part due to base effect, full year inflation will average over 8%. While there have been signs of growth decelerating, we do not expect an abrupt deceleration in growth. We maintain our full year FY12 GDP growth estimate of 7.6%, down from 8.5% in FY11.
View from Industry
Chanda Kochhar, Managing Director & CEO, ICICI Bank:
Overall, the policy clearly indicates that inflation is the top priority and future policy action will also be based on the inflation trajectory. While this is aimed at cooling demand in the near-term and thereby controlling inflation, we must recognize that high growth and rising incomes in recent years have created strong demand momentum in the economy. As a country we must recognize that it is critical for us to address the long term structural factors, which means investing in infrastructure and production facilities that balance demand and supply, and create a foundation for stable growth with anchored inflation in the future.
Overall, the policy clearly indicates that inflation is the top priority and future policy action will also be based on the inflation trajectory. While this is aimed at cooling demand in the near-term and thereby controlling inflation, we must recognize that high growth and rising incomes in recent years have created strong demand momentum in the economy. As a country we must recognize that it is critical for us to address the long term structural factors, which means investing in infrastructure and production facilities that balance demand and supply, and create a foundation for stable growth with anchored inflation in the future.
Rana Kapoor, Founder, Managing Director and CEO, YES BANK:
With incipient signs of growth moderation emanating, the RBI will need to balance the near term growth correction with its medium term inflation objective. This balance will get more challenging as concerted monetary tightening finds further transmission into the economy. The efficiency of transmission mechanism may pose some risks amidst moderating credit demand conditions. Going forward, the monetary policy action will need to cautiously weigh the pros and cons of the effectiveness of further rate actions on managing aggregate demand in the economy.
With incipient signs of growth moderation emanating, the RBI will need to balance the near term growth correction with its medium term inflation objective. This balance will get more challenging as concerted monetary tightening finds further transmission into the economy. The efficiency of transmission mechanism may pose some risks amidst moderating credit demand conditions. Going forward, the monetary policy action will need to cautiously weigh the pros and cons of the effectiveness of further rate actions on managing aggregate demand in the economy.
Pradeep Jain, Chairman, Parsvnath Developers and Chairman, Confederation of Real Estate Developers' Association of India (CREDAI):
Well, time and again it has been expressed that until and unless steps are taken to improve supply system, this increase by RBI is going to have a minimal effect on inflation. This is 11th time in last 17 months that rates have been increased and it is evident to all that it has not been material in taming inflation to a desired level. Instead, if measures had been taken to kick start production and manufacturing to support supply in market, we might have seen a different scenario altogether. The move has come as a surprise to us. While we were expecting a moderate hike of 25 bps but hiking rates by 50 bps is going to dampen the growth.
Dilip Modi, President, Assocham:
The single minded focus of RBI in tackling stubborn inflation has continued its tight monetary management which it does not wish to accelerate as the up side risk to global growth as well as crude and commodity prices have not been stable and sustainable.
The single minded focus of RBI in tackling stubborn inflation has continued its tight monetary management which it does not wish to accelerate as the up side risk to global growth as well as crude and commodity prices have not been stable and sustainable.
The increased repo rates of 50 bps, beyond market expectations, have not been welcomed by the market and there is definitely adverse impact on the already falling growth momentum in interest sensitive sectors, thus may constrain demand.
View from Fund Managers
Ramanathan K, Chief Investment Officer, ING Investment Management:
"The 50 bps rate hike was above expectations. The more important point is the fact that there is no clear indication that the RBI is at the stage of pressing the pause button. I still feel that we are at the end of rate hike cycle and any further rate hike beyond 25-50 bps is going to impact growth significantly below the trend level. While RBI rates are around the 8% levels the bank 'base rates' are in the range of 9.5-10.5%. The average lending rates (for working capital and term loans) to lower than AAA corporates are between 10.5-14%. At these high interest rate levels investment demand is surely expected to get impacted as incremental capex plans of corporates would be put on hold".
Sandesh Kirkire, CEO, Kotak Mutual Fund:
The unexpected hike in the repo rate by 50 bps is indicative that RBI has taken a hawkish stance vis-a vis the inflation outlook. This is ostensibly on account of the marginal cut in the monsoon forecast, continued buoyancy in the oil prices and increased debt solvency challenges in the 'West'. The resultant moderation in the domestic economic growth rate may be more than expected, and the deceleration in the credit growth may help augment the gilt appetite of the PSU banks.
Navneet Manot, Chief Investment Officer, SBI Mutual Fund:
The unexpected hike in the repo rate by 50 bps is indicative that RBI has taken a hawkish stance vis-a vis the inflation outlook. This is ostensibly on account of the marginal cut in the monsoon forecast, continued buoyancy in the oil prices and increased debt solvency challenges in the 'West'. The resultant moderation in the domestic economic growth rate may be more than expected, and the deceleration in the credit growth may help augment the gilt appetite of the PSU banks.
Navneet Manot, Chief Investment Officer, SBI Mutual Fund:
The larger than anticipated actions have resulted in market rates moving up by around 10bps across the curve especially in the 10y segment (8.42% 10 Y g sec and 9.47% 10y AAA). Since the RBI has offered no guidance as to the anticipated peaking of policy rates, the near term market movements could remain volatile with a bearish bias. With the RBI having increased rates by 125 bps in the last 3 months, the additional policy actions are likely to be spaced out and in response to inflation developments. This could result in more of a volatile range for market yields.
Sampath Reddy, Chief Investment Officer(Equities), Bajaj Allianz:
Due to the policy measures and continued high interest rate environment, corporate earnings growth has been on deceleration mode over the last 3 quarters. The consensus earnings estimate was already downgraded by about 7-8% in the last three quarters. The consensus estimate of earnings growth for the first quarter of the FY12, has been at ~8% while the full year growth estimate for FY12 is around 14%-18%. This indicates that the earnings growth for large corporates is largely back ended with the expectation of a rebound in growth in the second half. With policy action not being conducive to high growth and interest rates remaining elevated for the remainder of the year, the earnings growth estimate could witness further downward revision.
Due to the policy measures and continued high interest rate environment, corporate earnings growth has been on deceleration mode over the last 3 quarters. The consensus earnings estimate was already downgraded by about 7-8% in the last three quarters. The consensus estimate of earnings growth for the first quarter of the FY12, has been at ~8% while the full year growth estimate for FY12 is around 14%-18%. This indicates that the earnings growth for large corporates is largely back ended with the expectation of a rebound in growth in the second half. With policy action not being conducive to high growth and interest rates remaining elevated for the remainder of the year, the earnings growth estimate could witness further downward revision.
Yadnesh Chavan, Fund Manager, Fixed Income, Mirae Asset Global Investments:
The RBI's decision to increase repo rate and raising inflation forecast clearly indicate that the Central Bank believes that WPI will remain under pressure given the strong demand side pressures coupled with higher crude prices and MSP prices. For the policy actions to be effective, it is now extremely critical that the government addresses supply side bottlenecks, especially in the food and infrastructure sectors.
Going forward, we expect yields to remain under pressure due to continuous supply of government bonds by means of borrowing, pressure on fiscal deficit due to increased subsidy burden, strained liquidity in the system and continuance of increasing trend in inflation despite the 475 bps hike in operational policy rates.
View from Market Participants
The RBI's decision to increase repo rate and raising inflation forecast clearly indicate that the Central Bank believes that WPI will remain under pressure given the strong demand side pressures coupled with higher crude prices and MSP prices. For the policy actions to be effective, it is now extremely critical that the government addresses supply side bottlenecks, especially in the food and infrastructure sectors.
Going forward, we expect yields to remain under pressure due to continuous supply of government bonds by means of borrowing, pressure on fiscal deficit due to increased subsidy burden, strained liquidity in the system and continuance of increasing trend in inflation despite the 475 bps hike in operational policy rates.
View from Market Participants
Sanjeev Zarbade, Vice President, Private Client Group Research, Kotak Securities:
Given the negative surprise, markets reacted with a selloff. Interest rate sensitive sectors like banks, autos and real estate have witnessed higher selling pressure. In addition to this, the rate hike is also particularly taxing for debt-laden companies as they would have to suffer higher interest charges. Sector-wise, banks will see growth rates moderating. RBI has reduced credit growth target to 18% from 19%. Most banks will increase rates and that will contract demand. The NIMs might come under some pressure, atleast initially. Interest rate sensitive's will sentimentally be under pressure. Across sectors, the interest rate hikes will pinch profit growth. We see growth outlook being revised downwards for sectors like banks, autos, real estate and infrastructure.
Given the negative surprise, markets reacted with a selloff. Interest rate sensitive sectors like banks, autos and real estate have witnessed higher selling pressure. In addition to this, the rate hike is also particularly taxing for debt-laden companies as they would have to suffer higher interest charges. Sector-wise, banks will see growth rates moderating. RBI has reduced credit growth target to 18% from 19%. Most banks will increase rates and that will contract demand. The NIMs might come under some pressure, atleast initially. Interest rate sensitive's will sentimentally be under pressure. Across sectors, the interest rate hikes will pinch profit growth. We see growth outlook being revised downwards for sectors like banks, autos, real estate and infrastructure.
Abhijit Majumder, Senior Research Analyst, Institutional Equities, Prabhudas Lilladher:
We believe a 50 bps rate hike was largely unexpected and passing on hike of such a magnitude could be difficult for banks. Credit growth estimates will get lowered impacting earnings negatively. Expect downside of 5-10% for the sector in the near term. Continue to remain selective with top picks being Axis Bank, SBI, BoB etc.
We believe a 50 bps rate hike was largely unexpected and passing on hike of such a magnitude could be difficult for banks. Credit growth estimates will get lowered impacting earnings negatively. Expect downside of 5-10% for the sector in the near term. Continue to remain selective with top picks being Axis Bank, SBI, BoB etc.
Devendra Kumar Pant, Director, Fitch Ratings:
"RBI's monetary policy was announced in the backdrop of sticky inflation, growth moderation and uncertain global economic conditions. Today's hike in repo rate by 50 bps is mainly to control inflation, especially non-food manufactured inflation, which is going out of hand. This will certainly have its impact on economic growth, which is likely to be below 8%".
"RBI's monetary policy was announced in the backdrop of sticky inflation, growth moderation and uncertain global economic conditions. Today's hike in repo rate by 50 bps is mainly to control inflation, especially non-food manufactured inflation, which is going out of hand. This will certainly have its impact on economic growth, which is likely to be below 8%".
D.K Aggarwal, Chairman & MD, Sanlam Investments & Advisors (India):
We expect the pressure would be felt on sectors like, automobile, realty, banking, etc. RBI in a conscious effort is trying to calm down the private consumption demand by increasing the policy rates thereby discouraging producers to pass on the higher cost in order to alleviate the inflation in non-food manufactured goods basket. The ratio of bank credit and non-bank credit now stands at 51:49 for the 1st quarter compared to 64:36 in the corresponding period. I think RBI having cognizance of slowing industrial activity would definitely weigh the moderating growth in its future policy actions while tackling with the inflationary pressures.
We expect the pressure would be felt on sectors like, automobile, realty, banking, etc. RBI in a conscious effort is trying to calm down the private consumption demand by increasing the policy rates thereby discouraging producers to pass on the higher cost in order to alleviate the inflation in non-food manufactured goods basket. The ratio of bank credit and non-bank credit now stands at 51:49 for the 1st quarter compared to 64:36 in the corresponding period. I think RBI having cognizance of slowing industrial activity would definitely weigh the moderating growth in its future policy actions while tackling with the inflationary pressures.
courtesy: myiris
