In the backdrop of a global build-up of inflationary pressure, first due to loose monetary policy and later due to accelerated global supply chain issues due to Russia Ukraine conflict, it was only a matter of time before these inflationary forces would start to have a trickle-down effect on India. As a result, India’s CPI inflation stayed above 6% for three consecutive months, and it is expected to cross 7% in April 2022, clearly out of the comfort zone of RBI.
On 4th May 2022, the markets were caught off guard when RBI called an off-cycle MPC meet. The committee unanimously decided to raise the Repo rates by 40 bps to 4.4% and the CRR by 50 bps to 4.5%.
Why did Off-Cycle Policy decision come as a surprise
First, this was a complete U-turn. Until recently, the central bank maintained that supply-side factors largely drove inflation, and these factors were expected to ease. Thereby the inflation was expected to fall in the second half of FY23. Also, the timing of this meeting was the talk of the town as it was barely hours ahead of the widely anticipated 50 bps rate hike by the US fed.
While the market participants earlier were concerned that the RBI was falling behind the curve by not going in for rate hikes. With this 40bps rate hike, the Central Bank has shown a clear intent to tame the hot inflation.
The impact of Off-Cycle Policy
The surprise announcement pushed up the bond yields. The 10yr yield surged from 7.11% to 7.37%; similarly, the yield on the 5yr benchmark surged from 6.65% to 7.01%, marking a significant rise in yields. The equity markets, too, reacted negatively, with the Nifty and Sensex sliding by 2% at the day’s end.
Market experts believe the rate hike will make borrowing expensive but may not impact credit growth in a significant way. Additionally, the increased CRR will immediately suck out liquidity to the tune of 87k Cr.
Way forward?
One may recall that back in 2020,the Central bank had resorted to ultra-accommodative monetary policy. Accordingly, they slashed the repo rates from 5.15% to 4% (A rate cut of 75bps followed by another 40bps rate cut) in just two months. RBI Governor Mr. Shaktikanta Das., in yesterday’s meeting, highlighted that they view this hike as a reversal of the earlier actions in 2020 and withdrawal of the earlier accommodation. While the actions ofMPC will be guidedby the rapidly evolving situation and sensitive to new realities, if one had to draw an inference, one shouldn’t be surprised to see a total rate hike of 75 bps in the coming months of this calendar year.
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Author: Anuj Desai, Research Analyst, Passive Funds
Co-author: Ashish Tekwani, Research Analyst, Passive Funds
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