“Off-cycle move suggests more aggressive rate hikes”


The RBI’s surprise decision to raise the repo rate on Wednesday is a clear signal that it will initiate a series of rate hikes in the coming months to counter inflation, bank economists said.

“Today’s surprise move may be prompted by inflationary pressures ahead in April, which could be higher than expected – we currently estimate 7.6% pressure,” said Abheek Barua, chief economist at HDFC Bank. The stronger-than-expected rate hike by the RBI “paves the way for a more aggressive rate hike cycle than we previously anticipated,” he added.

“The renewed focus on inflation (and rising inflation risks) argues for a higher final interest rate in this interest rate cycle. We expect three more rate hikes this fiscal year from the RBI, with the repo rate likely to end the year at 5.15%,” added Mr. Barua.

Madan Sabnavis, chief economist at the Bank of Baroda, said while raising the repo rate would help “suppress the build-up of excessive demand pressures and thus slow inflation growth”, it would have little impact on the components that were driven by global factors.

“The overarching focus on inflation is significant as it stems from the MPC’s normal mandate of containing inflation as growth appears to be in better shape today,” noted Mr. Sabnavis. “But if we don’t address inflation now, growth may be at risk. This will be the main message of the so-called interim policy,” he added.

“The large hike in RBI between meetings shows that tackling inflationary risks is now a priority,” said Rahul Bajoria, Barclays’ chief economist for India. “We now expect the RBI to hike interest rates by at least 50 basis points at the June monetary policy meeting and see a short-term interest rate pause of only around 5.15%,” he added.

“We expect the RBI to hike interest rates to 5.15% by August and expect it to reassess macroeconomic dynamics to gauge the need for further hikes beyond that,” he wrote in a statement.

“We also believe that the RBI will seek to reduce liquidity in a calibrated manner and may make another 50 basis point CRR hike in the next MPC, but this will only be applicable at a later date,” he said.

“RBI’s frontloaded action today to raise interest rates and the CRR is a testament to the flexibility while remaining aware of changing areas of global disruption will go a long way in supporting markets,” said SBI Chairman Dinesh khara.

And auto dealers said the move would likely dampen auto sales significantly.

“This move will curb excess liquidity in the system and make auto loans expensive,” said FADA President Vinkesh Gulati. “While the PV segment may be able to absorb this shock from long wait times, the two-wheeler segment, which has been a non-performer due to the underperforming rural market, vehicle price hikes and high fuel costs, will not be able to take another hit from high vehicle borrowing costs,” added he added.

“Certainly this step will slow down the auto trade to some extent and further dampen the mood,” he assured.

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