Inflation in the advanced economies continues to hit historic highs prompting central banks to take aggressive action unheard of in recent memory. Earlier last week, the Fed chair raised the fed funds rate by 75 bps for the third time this year, making it the fastest and the steepest interest rate hike cycle in the Fed’s history.
The spill overs of such aggressive rate hikes trickle down to emerging economies in the form of Inflation. India’s CPI data for August (at 7% compared to 6.7% for July) point towards stickier Inflation & crossed RBI’s threshold for the eighth month in a row. Keeping this in mind, RBI raised repo rates by 50 bps for the third time in a row, taking the repo rate to 5.9%. 5 out of 6 members of the MPC were in favour of the decision and maintained the policy stance on withdrawal of accommodation while supporting growth.
A stormy weather
Mr Das highlighted that aggressive monetary policy actions by advanced economies is the third major shock (akin to a storm) apart from the pandemic & the Russia-Ukraine conflict. Still, India has been resilient in terms of macroeconomic stability. Industrial activity & business confidence has reached multi-year highs while the urban & investment demand is picking up due to unrestricted celebration of festivals. Even the Indian Rupee has depreciated much less compared to its peers & even some advanced economies.
“The world is in the eye of a new storm.”
– Shri Shaktikanta Das, Governor RBI
Global headwinds, however, continue to persist with consistent geopolitical tensions & slowing global growth, causing recession fears in the advanced economies (the US is already in a technical recession). India, too, faced some challenges, with the real GDP growth in Q1 of FY23 coming in at 13.5%, lower than the estimated 16.2%. While RBI did lower its real GDP growth estimates for the current FY from 7.2% to 7.0%, the projection for Q1 of FY24 was revised upwards from 6.7% to 7.2%.
While assessing Inflation, Mr Das mentioned that they expect Inflation to moderate in the near term, despite persistent pressures. Therefore, the MPC retained its inflation projections, signalling RBI’s confidence in the Indian economy. Moreover, a recent fall in global commodity prices & strong rebound in the services industry puts India in a better place to combat Inflation.
The Impact on Investment
The street was already expecting a 50 bps rate hike & by retaining the Inflation forecast, markets reacted positively due to a lack of negative surprises. Nifty 50 & Sensex surged ~1.6% & ~1.8%, respectively, breaking the week-long losing streak. Bond investors reacted favourably, with the 5-year bond yields closing flat and the 10-year bond yields rising by six bps to 7.4%.
Way forward for the Market
So far this year, the MPC has raised the repo rates by 190 bps. However, in the recent meeting, Mr Das didn’t sound hawkish & maintained their stance of being flexible & agile in their approach. Therefore, actions will be taken based on how macro variables will pan out & not be restricted by any conventional approach. With the current repo rate already at 5.9%, the market estimates of the terminal rate have increased from the 6% expected in the earlier meeting to 6.25%-6.5%.
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