After RBI Governor Shaktikanta Das posed a riddle to the media, markets and ‘informed circle’ to guess if the MPC’s meeting outcome is hawkish, dovish or ‘something else’ entirely, the markets seem to have come to a consensus: the monetary policy outcome is largely hawkish. Even though investors had factored in the repo rate hike of 35 bps that was declared today, as the announcements from the Reserve Bank were digested, the markets have stumbled mildly into the red from trading flat. NSE Nifty was trading at 18,586 in the late afternoon trade, while Sensex was at 62,522, down by over 100 points.
Ritika Chhabra, Economist and Quant Analyst, Prabhudas Lilladher said, “The quantum of the rate hike was on expected lines. However, the tone of the meeting was slightly hawkish than what the markets were expecting. The governor emphasized on containing second-round effects of inflation and inflation expectations.”
RBI monetary policy stance unchanged, tone hawkish
Since the RBI hasn’t changed its stance from ‘withdrawal of accommodation’ to ‘neutral’, experts have come to the consensus that the RBI’s outlook remains hawkish. “We believe that RBI’s stance has remained moderately hawkish with the continuation of its stance of ‘withdrawal of accommodation’,” said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.
“The MPC retained the stance at ‘withdrawal of accommodation’. The unchanged stance along with a slightly hawkish tone focusing on the stickiness of ‘core inflation’ as mentioned in the Governor’s statement has led to a mild rise in yields post policy. We expect the benchmark 10 year bond yield to continue to trade in a range between 7.20% to 7.50%. Thus with lower duration risk and volatility, the short duration products are recommended for investors with 3-4 year investment horizon,” stated Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.
Also read: RBI monetary policy highlights: 7 key announcements by RBI Governor Shaktikanta Das
No long lasting effect on share market
Though the markets have fallen mildly, most analysts believe that the RBI’s decision will not have a long lasting effect on the share market. “A change in stance to dovish going forward by RBI will lead to a rally in the banking segment while a prolonged hawkish stance will impact deposit rates and lead to narrowing NIMs, more so for PSBs. We don’t see any material impact on the stock market,” said Anil Rego, Founder and Fund Manager, Right Horizons.
“Given a balanced view, we do not expect any material impact of RBI policy on equity markets. Even bond yields have marginal firming up of 4 bps as initial reaction to the policy announcement. We remain positive on equity markets in the near-to-medium term with real estate, banks, consumer and engineering/capital goods as preferred sectors,” adds Gaurav Dua, Head Capital Market Strategy, Sharekhan by BNP Paribas.
End of repo rate hike cycle: How far is it?
Experts also believe that the rate hike cycle will end once the repo rate touches the terminal rate of 6.5% and are thus pricing in a 25 bps hike in the February MPC meet. “With inflation expected to remain above 6% till February 2023 and amid elevated and sticky core inflation prints, we anticipate MPC to hike policy rate by another 25-35 bps in February 2023,” said Garima Kapoor, Economist, Elara Capital. Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research added, “Possibility of a further round of rate hikes in February 2023 and a potential terminal rate of 6.5% by the beginning of FY24. RBI has also made it clear that liquidity calibration will continue to take place and market participants have to get used to a lower level of liquidity surplus in the system.”
