RBI Hikes Repo Rate By 35 Bps: Here’s How Industry Reacts

India's central bank's repo rate was raised by 35 basis points (bp) on Wednesday, as widely expected. This is the fifth consecutive hike, as the battle against high inflation is not over.

The Monetary Policy Committee (MPC), consisting of three members from the RBI and three from outside, raised the policy rate, or repo rate, to 6.25 per cent by a majority decision. Five out of six members voted for the increase.

Here’s how industry people and experts reacted to RBI’s rate hike:

Lakshmi Iyer, CEO- Investment Advisory, Kotak Investment Advisors

The RBI MPC raised repo rate by 35 basis points to 6.25 per cent with 5-1 vote. The stance remained focused on withdrawal of accommodation. While this was ours as well market consensus, it seems like we may not be fully done with the rate hiking cycle. The inflation guard continues to remain. Key to now track FOMC outcome in the coming week. Expect bond markets to give up some gains and trade range bound as global growth concerns dominate.

Naveen Kulkarni , Chief Investment Officer, Axis Securities PMS

As expected, the Monetary Policy Committee increased the policy rate by 35bps with a majority decision of five out of six members voting for it, and more importantly, re-iterated its intention of withdrawing accommodative policies with a majority decision of four members out of six voting for it. The RBI has reduced India's growth forecast for FY23 from 7 per cent to 6.8 per cent, but India remains one of the fastest-growing major economies globally. The RBI governor exhibited confidence in India's growth trajectory but mentioned that it is crucial to be vigilant to the secondary effects of high global commodities, especially energy and food prices. We believe the MPC decisions today are on expected lines and would not have any major impact on Indian markets, purely based on decisions announced today.

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company

The RBI has given a “Main Hoon Na” (we are there) policy, reassuring the market. In a world where central banks are fighting to regain credibility, the RBI stands tall managing conflicting objectives of growth and inflation admirably. A data-driven RBI will keep on playing balls on merit and continue to keep the growth scoreboard moving with inflation under check.

Madan Sabnavis, Chief Economist, Bank of Baroda

There was no real surprise with 35 bps indicating that fight against inflation is not yet over but there is hope of downward trajectory in future. Therefore not 25 or 50 bps but something in-between was opted for this time. We believe that given the RBI trajectory of inflation in Q3 and Q4 there will be one more rate hike in February of 25 bps bringing the terminal rate to 6.5 per cent. 

Growth projections lower at 6.8 per cent and while magnitude is marginal, it still indicates resilience of the economy on balance. These are relevant observations given that World Bank has scaled up projections just yesterday. 

The stance continues to be withdrawal of liquidity which is relevant here as we are still in surplus though lower than 3 months back. This is why the stance is that there is scope for further withdrawal of liquidity from the system. However, there is assurance that RBI will provide liquidity when required as it tracks SDF and VRRR balances. One may surmise that there will be VRR auctions or OMOs once the system moves towards a deficit from the present surplus. 

On the whole, it is good for markets – Sensex up with announcement. GSec yields up marginally mirroring the rate hike.

Churchil Bhatt, Executive Vice President and Debt Fund Manager, Kotak Mahindra Life Insurance Company

India’s monetary policy committee (MPC) today delivered a 35 bps policy rate hike with a 5 to 1 vote. The policy stance was retained as ‘withdrawal of accommodation’, suggesting no letting up in Central Bank’s fight against inflation. The MPC revised its growth projection for FY2023 down by 20 bps to 6.8 per cent, while it kept its inflation projection unchanged for FY2023 at 6.7 per cent. 

Governor Das cited high core inflation as a key policy concern, and underscored the importance of anchoring headline inflation around 4 per cent for sustainable growth. Even though headline CPI is likely to fall below the MPC’s upper tolerance band of 6 per cent over the next few months, we remain some distance away from the ultimate policy goal of 4 per cent headline CPI. Hence, while policy rates in India may not go much higher from here, the bar for any possible policy pivot remains high. In this backdrop, we expect the 10-year G-Sec to trade in the range of 7.25 - 7.45 per cent in the near term.

Srikanth Subramanian, CEO, Kotak Cherry

As expected RBI delivered a 35 bps rate hike, and further calibrated rate hike on back of elevated inflation levels. The RBI is walking a tightrope where it has to balance growth and inflation. While we expect the RBI to continue to hike rates until it is comfortable with the desired inflation levels, the good news is going ahead the rate hikes won't be steep. We expect markets to be range bound on the back of inflation and FOMC decision expected next week. It will be better for investors not to take concentrated bets in the markets and tread cautiously as the full scenario (domestic as well as global) is yet to play out.

Anindya Banerjee, VP, Currency Derivatives and Interest Rate Derivatives, Kotak Securities

RBI's monetary policy was on expected lines with a 35-bps hike and promised to do more. Their comments on Rupee were also in line with their previous comments. They target volatility and Rupee remains stable on a REER basis. In a way it means, RBI would be watching closely after volatility has increased in USDINR, over the past two trading sessions. But without active intervention or announcement of sell-buy swap, we could see USDINR move higher. We expect a range of 82.00 and 83.00.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

The RBI, in line with expectations, hiked repo rate by 35 bps to 6.25 per cent. The stance also remains unchanged at withdrawal of accommodation though the voting against this stance has increased to two members. Overall, the concern on inflation continues especially as core inflation remains sticky and elevated. Growth concerns remain limited, for now. We believe the RBI is now close to the terminal rate with the real policy rate, based on few quarters ahead inflation, around 100 bps positive. The February policy decision will be finely split between a pause and a last 25 bps hike with a bias towards a hike given that near term inflation readings is likely to remain relatively elevated around 5.5 per cent.

Dharmakirti Joshi, Chief Economist, CRISIL

The expected moderation in the pace of tightening happened. It stems from rising external risks to growth, and reduced upside risks to inflation because of a material fall in crude oil prices. To be sure, and as the RBI Governor has highlighted, the inflation battle is far from over because the sticky core continues to put pressure on the headline. Today’s rate hike was to break that core-inflation persistence.

Between now and next policy, RBI will closely monitor the impact of its previous rate hikes on domestic demand/core inflation, as well as the actions of systemically important central banks such as the US Federal Reserve. That said, expect the RBI to strike if elevated inflation prolongs.

Dilip Modi, Founder, Spice Money

Since its inception, BBPS has grown exponentially with 94.97 million value of transactions in November 2022 across categories like electricity, Fastag, DTH, Loan Repayment, Mobile Postpaid, LPG gas, among others. Within all these categories, loan EMI repayment has emerged as one of the significant use cases in rural India. 

BBPS's success has resulted in an ever-expanding range of services that can be paid for using the system. We are delighted to see that the Indian government has recognised the potential of BBPS and has expanded its scope to all types of payments and collections, both recurring and non-recurring, as well as all types of billers (businesses and individuals).

The new enhancements will make the platform more accessible to a wide range of customers as well as businesses. The initiative will help individuals and businesses to make a plethora of payments through BBPS in a faster and more efficient manner. Bharat Bill Payment System has become an essential part of rural economy and will continue to have a significant impact in driving last mile connectivity in the coming years.

George Alexander Muthoot, MD, Muthoot Finance

Given the backdrop of continued geopolitical challenges on the global front, it is heartening to see RBI’s outlook on the Indian economy remaining resilient and drawing strength from strong macroeconomic fundamentals. With the world economy still marked by shocks, the RBI has announced the fifth consecutive hike in repo rate with an increase of 35 bps to 6.25 per cent, along with a focused stance on withdrawal of accommodation.

In line with our expectations, the RBI governor further retained the inflation projection at 6.7 per cent, and lowered the FY23 GDP forecast to 6.8 from 7 per cent earlier. However, driving the confidence from recovery seen in rural demand and rise in urban consumption, resilience in the agricultural sector, improvement in consumer confidence, traction in investment activity, we are optimistic about the broadening of economic activities which bodes well for demand for gold loans and pick-up in demand for credit.

With rural demand recovering and strong improved consumer confidence, we believe that we will continue to witness the stability in gold loan demand and revival of credit demand. The RBI announcement on enhancing UPI by introducing a single-block-and-multiple-debits functionality will further lead to ease of making payments in e-commerce space and ease of making payments for investment in securities. Also, enhanced scope of Bharat Bill Payment System (BBPS) will deepen the access for individuals and businesses leading to faster access of funds and improved efficiency.

Madhavi Arora, Lead Economist, Emkay Global Financial Services

A 35bps hike today implies the ex-post real rates still sub 1 per cent -- RBI's estimated real neutral rate, keeping 6-month ahead inflation as an anchor (a more certain trajectory vs one-year ahead), which may imply more space for another shallow hike of up to 25bps to reach a neutral rate (albeit not necessarily implying end of cycle) . At this point, we still think that the RBI would not turn too restrictive however, the extent of global disruption will remain key. We are closely watching the global pace of inflation deceleration and how the impending recession will shape DM central bank policies, which could influence the RBI’s reaction function. The still-fluid global situation might require frequent adjustments in macro and policy assessments ahead as far as terminal rates are concerned.

Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management

The RBI, on expected lines, hiked the repo rate by 35bps to 6.25 per cent. The slowing pace of the rate hike and softening inflation makes us believe that we are now at the end of the tightening cycle. The GDP estimate for FY23 has been cut by 20bps to 6.8 per cent, essentially making the impact of the tightening cycle on economic growth. We believe that India remains on a strong footing and earnings growth will accelerate making equities an attractive investment option.

Rahul Kalantri, VP Commodities and Currency, Mehta Equities

The Reserve Bank of India raised its key repo rate by 35 bps to 6.25 per cent during its December meeting, the sixth rate hike in a row, amid slowing inflation due to moderation in food prices, as widely expected. The annual inflation eased to 6.77 per cent in October, down from September's five-month high of 7.41 per cent. Although inflation hit a three-month low in October, it remained above the RBI's tolerance range.

Shrikant Shrivastava, Chief Risk Officer, IMGC (India Mortgage Guarantee Corporation)

Now as we have another 35-bps increase in repo rate the EMI’s are expected to go up further by another ~3-5 per cent. As far as loan tenor increase is concerned, I don’t think there is much room for loan tenor increase beyond the 13 years already done till date, due to 190 bps previous increases.

Home loan borrowers who have had their home loan original interest rate at 10-11 per cent and initial loan tenors above 25 years would have had no option but to increase their EMI because any attempt to increase their loan tenor would result in loans becoming negatively amortised. Meaning, the original EMI would not be sufficient to cover the monthly interest payable with the existing EMI thereby resulting in the loan principal increasing every month instead of reducing. 

Most banks have fully passed on the repo rate increase of 190 bps to the consumers of home loans till date. This rate hike of 190 bps has resulted in a loan tenor increase of ~ 13 years for borrowers who had initially opted for 20 years loan period, assuming they had taken a home loan at 6 per cent at the time of home purchase. Alternatively, those borrowers who opted for an EMI increase instead of a loan tenor increase have seen their EMI go up by ~20 per cent already.

Prabhat Chaturvedi, CEO, Netafim Agricultural Financing Agencyon 

The fifth straight increase in repo rate and focus on the withdrawal of accommodation by the Central bank to control hovering inflationary concerns and macroeconomic scenarios were expected. However, going forward, the rate hikes would start impacting the growth of the domestic economy. The central bank must maintain the neutral or positive zone of the repo rate while focusing inflation control within a tolerated threshold.

As the country is on a bright spot in the global economy, currently, it's an opportunity for India to grow and consolidate gains. As India wants to make MSMEs self-reliant, higher interest rates will increase the cost of borrowing for MSMEs. It could lead a slowdown in investment and expansion plans and impact profitability for the sector. MSMEs are already battling inflation headwinds, lower demand, and loan interests. As MSMEs requires certainty of funds, we believe they would be at the edge to absorb this surge in the repo rate.

Harish Prasad, MD Banking Solutions, India, FIS

The reach and convenience of UPI and BBPS make a great case for widening their use and digitising payments further. Supplementing the recent push of the RBI around the retail CBDC which offers a platform to displace physical currency, BBPS and UPI make for a great combination to further reduce the use of physical currency, offering unmatched speed and convenience making everyday payments much more efficient. Their use will continue to accelerate through expansion in both the depth and breadth of payments which can be made using UPI and BBPS. Many of these payment platforms will likely support use of the retail CBDC as well over time.

Rajsri Rengan, Head of Development - Banking and Payments, India and Philippines, FIS

The recent announcement around enhancing the UPI capabilities is a big move towards deepening the penetration of digital payments in India. With these enhancements, the customers will be able to block funds in their accounts for various payments. It will facilitate in making smoother e-payments and increase the efficiency of online checkouts during e-commerce transactions. Additionally, the RBI’s move to improve the scope of Bharat Bill Payments System across categories of payments and collections will enable a larger section of economy including individuals and businesses to access the system.

Neeraj Dhawan, Country Manager, Experian India

The Reserve Bank has maintained the "accommodation withdrawal" stance while hiking the repo rate by 35 basis points to 6.25 per cent to ensure that inflation remains within the target going forward; it is the fifth increase since May 2022. The central bank is still concerned about the stickiness of core inflation, and all immediate efforts would be directed toward breaking it without impeding economic growth. The buoyancy in rural demand, non-food credit and private consumption in general is very comforting, but external factors like US Fed rate hikes, oil prices, and international geopolitical issues continue to be a source of concern.

Akash Sinha, CEO and Co-founder, Cashfree Payments

RBI’s announcement with respect to UPI payments and Bharat Bill Payment System (BBPS) are encouraging in the payments ecosystem. The RBI’s announcement around increasing the capacity of UPI by introducing single-block and multiple debits functionality, will enable users to block funds in their account, which can be debited at the time of need. This will make it more convenient to make payments towards investments in securities through the RBI’s Retail Direct platform and e-commerce transactions.

RBI has been working towards boosting the efficiency and effectiveness of BBPS, to facilitate and accelerate the adoption of cashless payments and today’s announcement to expand its scope will further aid in increasing the accessibility for a wider set of individuals and businesses. India, as an economy, has already witnessed a rapid rise in the digital payments, logging 23.06 bn transactions amounting to Rs 38.3 lakh crore in the third quarter this year. RBI’s recent efforts with respect to digital payments will certainly contribute towards the cashless economy imperative.

Avinash Godkhindi, MD and CEO, Zaggle

While the RBI continues to maintain its hawkish tone on inflationary expectations, RBI’s repo rate hike by 35 basis points was on expected lines. Despite the RBI slashing FY23 GDP projections from 7 to 6.8 per cent, Indian economy remains resilient and is still among the fastest growing major economies in the world.

The global environment remains challenging, however we are confident about India growth story given the relatively strong macro fundamentals, traction in investment activity, robust financial system, healthier banks and corporate India. Broader policymakers support to the Indian startup ecosystem is another positive.

The success of UPI has been outstanding and praised globally and UPI has emerged as one of the most popular retail payment system in India. RBI’s decision to further enhance UPI by introducing a single-block-and-multiple-debits functionality will further boost the digital payments infrastructure in the country. This will significantly enhance the ease of making payments in e-commerce space and building higher trust in transactions as merchants can be assured of timely payments while the funds remain in the customer’s account till actual delivery of goods or services.

Further the RBI has enhanced scope of Bharat Bill Payment System (BBPS) to include all categories of payments and collections, both recurring and non-recurring in nature. With this, the platform has now become accessible to wider set of individuals and businesses who can now benefit with faster fund access and improved efficiency. This will make the entire payments experience transparent and will lead to robustness and growth of India’s payment infrastructure

Sumit Chanda, Founder and CEO, JARVIS Invest

The 35bps repo rate hike was expected, however the RBI maintained its hawkish stance on inflation being sticky and the need to maintain its vigil on inflationary expectations. The RBI maintained CPI inflation level projection for FY23 at 6.7 per cent while lowering the FY23 GDP projection to 6.8 per cent from 7 per cent projected earlier.

The markets did not react to the news since the policy was in line with their expectations. India continues to be the fastest growing economy in the world, investment activity is gaining traction, rural demand is recovering, and corporate earnings have been good. Global commodity and crude prices have moderated recently, although the trajectory will be keenly watched. We continue to believe that India equity markets are poised to hit new highs. Good time to be invested in equities but stick to asset allocation.