RBI Policy | Stocks rejoice on possibility that RBI may go slower on rate hikes

Benchmark equity indices rose towards the day’s high immediately after the conclusion of Reserve Bank of India Governor Shaktikanta Das’s monetary policy statement highlighting investor comfort and belief in a milder trajectory of rate tightening by the central bank going ahead.

The Monetary Policy Committee chaired by Das approved the third successive 50 basis point hike in the repo rate to 5.9 percent on September 30, which was in line with market’s expectations. However, the MPC’s outlook on inflation is where the market found its cue to surge higher.

The MPC projected that while inflation will average 6.7 percent in 2022-23, it will head lower in the next financial year. Further, the MPC expects consumer price inflation to average around 6 percent in the second half of 2022-23 suggesting that calibrated rate hikes could soon bring the real policy rate closer to the desired level of 0.8-1 percent going ahead.

“This conscious front-loading could give them some breather next year on shallow hikes ahead,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

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Arora believes that with inflation likely to be largely in line with RBI’s estimates, the 50 bp 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%”.

Churchil Bhatt, executive vice president and debt fund manager at Kotak Mahindra Life Insurance Company, expects the MPC to continue to tighten policy rates going ahead given that retail inflation still remains above the comfort band of 2-6 percent.

Bhatt, nonetheless, argued that India’s inflation problem remains benign compared to the multi-decade high inflation in Western economies. “Markets may take comfort in the fact that the future policy tightening by RBI will be relatively unhurried,” Bhatt said.

Further, the comfort expressed by the governor on the rupee’s depreciation against the US dollar in recent months as well as India’s forex reserve levels also boosted confidence that the central bank will not have to raise interest rates aggressively to tame the decline in the domestic currency.

The rupee sank to a record low earlier this week, nearing the 82 per dollar mark, amid a record surge in US dollar globally due to the aggressive interest rate hikes projected by the US Federal Reserve earlier this month.

India’s foreign exchange reserves have fallen nearly $100 billion over the past year but the RBI said that two-thirds of that decline was attributable to the change in the valuations of the underlying currencies in which the reserves were held. While the rupee has depreciated against the US dollar, it has appreciated considerably against the euro, pound sterling and yen over the past year.

“We continue to expect another 35 bp hike in December followed by a pause with the RBI assessing Fed actions, and impact of past rate hikes on domestic growth and inflation,” Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said.

That said, a lot will depend on how the outlook for rate hikes from the US Federal Reserve evolves from hereon given rising risk of a financial crisis in Europe and other parts of the world due to dollar’s persistent strength, asset managers said.

Going ahead, investors focus will turn to the September quarter earnings season with expectations that a strong festive period and sequential decline in raw material prices should result in better earnings performance than the previous quarter.

At 11:40 am, Nifty 50 index was higher by 0.9 percent at 16,957 points while the BSE Sensex sat at 56,905 points, up 0.9 percent.

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