Ever since the MPC’s June rate hike of 50 bps, a lot has changed in the Indian & global economy. Commodity & food prices have shown some signs of softening with the crude oil prices dropping <$100 but volatility in global markets persists. Even though the US is witnessing a second consecutive negative GDP growth, the job market & consumer spending point otherwise.
With the Inflation numbers crossing RBI’s threshold for the 6th month in a row, the street was eagerly waiting for the RBI’s August MPC meeting. After initially surprising everyone with a 40 bps rate hike in May & not-so-surprising 50 bps rate hike in June, the RBI governor announced another rate hike of 50 bps on Aug 5th taking the repo rate to 5.4%. The MPC maintained its policy stance on withdrawal of accommodation. Mr Das highlighted that even though there is a lot of uncertainty in the global markets, India remains an outlier with strong & resilient macro-economic indicators indicating the worst might be over.
Safe and Soft Landing
A lot of fundamental data points on the demand side including investment activity, production numbers, urban demand & credit growth continue to post strong numbers indicating robust economic activity. Even with the ongoing global headwinds like US recession fears, slowing global growth & Russia-Ukraine war situation, the RBI was confident to retain its GDP growth forecast to 7.2%, making India one of the fastest growing economies in the world.
“In an ocean of high turbulence & uncertainty, Indian economy is an island of macro-economic and financial stability”
– Shri Shaktikanta Das, Governor RBI
RBI governor Mr Das also pointed out that the high inflation in India was ‘imported’ due to uncertain financial markets globally and there are signs of Inflation peaking at 7% for FY23. Unsurprisingly, inflation forecasts were therefore unchanged at 6.7%.
The Impact
Markets gave a mixed reaction with the Nifty 50 & Sensex closing marginally higher on the equity front. On the debt side, bondholders reacted negatively with the 10yr bond yields surging 14 bps from 7.16% to 7.3% & 5 yr bond yields up 13 bps from 6.9% to 7.2% reflecting a considerable increase in yields. This was mostly because the rate hike was on the higher end of expectations (50bps vs 35bps).
Way Forward
As already intended earlier, RBI has reversed its actions of 2020 after the current rate hike. So far since April, it has hiked the repo rate by 140 bps from 4% to 5.4% taking it higher than the pre-covid levels of 5.15%. Inflation numbers being above RBI’s threshold of 6% leaves the door open for further hikes. If the market estimates are to be of any indication, then the terminal repo rate (the rate after which there will be no hike) will be somewhere around 5.75%-6%, meaning there will be more, albeit smaller rate hikes for the later part of the year.
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