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ShreeMetalPrices: Reserve Bank of India raises the key policy interest rate by 35 bps.

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The Reserve Bank of India hiked its benchmark repo rate up by 35 basis points (bps) on Wednesday. As it was largely anticipated. This was the fifth consecutive hike as inflation remained high, and the central bank asserts that efforts to control inflation will not be eased.

The key lending rate, also known as the repo rate, was increased by the monetary policy committee (MPC). Which consists of 3 members from RBI and three external members, by a margin of 62.5%. The decision was supported by five out of the six members.

Additionally raised by the same amount to 6.00% & 6.50%, respectively, were the rates for the standing deposit facility and thus the marginal standing facility.

“Despite the rising international headwinds, the MPC has essentially maintained its confidence in the strength of domestic economy and only slightly reduced its GDP growth prediction for FY23 to 6.8%. This supports our conviction that domestic consumption has gained some healthy momentum this year and will probably continue to do so given the anticipated rebound in rural demand.”

Given the statement from the MPC and the ongoing pace in credit expansion, “Acuite sees a further increase in bank deposit rates over the period of the next 2 quarters to extent of 50-100 bps. The market for households, specifically in the middle – to high-ticket segment, may begin to be affecte by the pass through of high rates to loans.

Economist Response to Rising Inflation & Rising Interest Rates

“By maintaining its stance of ‘drawdown of accommodation,’ highlighting that the policy rate due to inflation is still adaptable. And asserting that “the fight against inflation is not yet over,’ (RBI Governor (Shaktikanta) Das has continued to talk hawkish.” Asserted AURODEEP NANDI, INDIA ECONOMIST & VICE PRESIDENT, NOMURA, MUMBAI.

However, it’s interesting to note that he said in his closing remarks that any future policy decisions would depend on data and take into account the tightening of the monetary policy already implemented. The MPC is still classified, with two votes against by the current stance and one vote in favour of a halt. Further indicating that the cycle of rate hikes is coming to an end.”

We have a last hike of 25 basis points in February, which is still debatable, followed by a halt. Repo rates will return to 5.75% by the end of 2023 thanks to a 75 bps cumulative drop that we are currently pencilling in for H2 2023.”

LIC Mutual Fund’s Marzban Irani, CIO (DEBT), in Mumbai, said “Initial impressions are that today’s MPC sounds hawkish. The 35 bps rate increase, the MPC’s unchanged attitude, and the 5:1 vote are all hawkish initiatives. However, in line with anticipated global increases. The pace of interest rate changes is decreasing from 50 bps down to 35 bps.”

Yields are restrained to the range of 7.25% to 7.35%. Depending on risk tolerance, this requires the possibility of investing in long-term fixed – income securities finances. Moving forward, we anticipate a 25 bps increase by April. Market participants must pay close attention to global rate rises and persistent core inflation.”
Economist DIPANWITA MAZUMDAR of the Bank of Baroda in Mumbai says “Demand pressure is anticipate to persist in the future. Which would increase pricing pressure. As stated in the corporate results for the second quarter, even pass-through of businesses to consumers has yet to take place.

Explanation: Why did the Monetary Committee hike the Interest rate?

Price inflation in cereals, milk, pulses, and spices is still present in November of 22 as well, thus there is a real concern to the headline CPI print.

“With the final rate at 6.5%, we anticipate the RBI to increase rates by another 25 basis points in its upcoming policy. For FY23, our CPI projection is 6.8%, and growth is also 6.8%.”

According to LAKSHMI IYER, CEO of KOTAK Investment Advisors Limited. “With a vote of 5-1, the RBI MPC increased the repo rate to 35 bps to 6.25%. The position remained concentrated on the cessation of accommodation. Although this was both our prediction and the consensus of the market. It appears that the cycle of rate increases may still be ongoing. The inflation guard is still in place.”

The conclusion of this week’s FOMC meeting of the US Federal Reserve is still crucial, according to Iyer.

“As concerns about global growth take precedence, expect bond markets will give up significant gains &trading rangebound.”

The announcement was somewhat more hawkish than even expected by markets. With no hint that the central bank is close to the end of its rate-hike cycle for the time being.” Says SAKSHI GUPTA, PRINCIPAL ECONOMIST AT HDFC BANK, Delhi.

“The central bank’s determination to continue fighting inflation is indicate by the repeat observation that growth is resilient even when there are upside threats to inflation. This could, on the margin, offer the rupee some supple support, particularly in light of the upcoming U.S. Federal Reserve meeting. We still anticipate a 25 bps rate increase in the February policy.

Chief Economist at Kotak Mahindra Bank in Mumbai, UPASNA BHARDWAJ. Says “The MPC maintained its stance of “removal of accommodation” despite delivering the 35 bps raise as anticipated. As inflationary worries fade, we continue to anticipate the MPC to maintain a vigilant focus. Before a longer halt, we predict another rate increase of 25 basis points.”

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