During the last month’s off-cycle MPC meet, RBI surprised everyone with a 40 bps rate hike (See our last blog here) and provided guidance for the future. Since then, there have been no major changes, the global Inflation is still skyrocketing, war is still a concern, crude oil prices are >$100 and so on. Drawing from the guidance provided earlier and the persistent concerns, the street was not surprised when RBI announced a 50 bps hike in yesterday’s (8th June 2022) scheduled MPC meet, taking the repo rate to 4.9%.
No surprises here
Inflation has been a cause of major concern for the markets and the same was reflected in the RBI governor speech, as he mentioned the word ‘Inflation’ 39 times during the MPC meet held the day before.
The markets too have been worried about the persistent inflation and hence the question wasn’t of ‘if there will be a rate hike’ but ‘by how much will be the rate hike’.
Post the announcement of 50 bps rate hike, the markets remained relatively calm with the Nifty & Sensex registering small dips, indicating that the markets may have already priced in the hike. This can be largely attributed to the guidance provided by the Governor during the last MPC meet held in May 2022.
Way forward
With the RBI expecting inflation for the current year at 6.7%, well above its comfort zone of 6%. The focus has now shifted from being ‘accommodative’ to ‘withdrawal of accommodation’. While the RBI governor didn’t mention where the repo rates might eventually settle, the street expects the rate hikes to be front loaded. While it is prudent to acknowledge that policy action will be flexible and dependent on how macro variables will pan out, it is very likely that the rates might soon reach the pre-pandemic level of 5.15% or even beyond that.
Author: Ashish Tekwani, Research Analyst, Passive Funds
Co-author: Anuj Desai, Research Analyst, Passive Funds
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