Spread the love

NEW DELHI: In an unscheduled move that came just hours before the US Federal Reserve’s policy statement, Reserve Bank of India Governor Shaktikanta Das announced a 40-basis-point hike in the benchmark policy repo rate.

In a video statement, Das said that the RBI’s six-member Monetary Policy Committee had held a two-day meeting starting May 2 and decided unanimously to increase the repo rate to 4.40 per cent from the record low of 4 per cent.

While the surge in global commodity prices following Russia’s invasion of Ukraine had significantly increased upside risks to India’s inflation, the RBI’s decision to act before its scheduled policy meet in June came as a bolt from the blue to markets.

The Sensex plummeted more than 1,300 points while India’s 10-year benchmark government bond yield surged close to 30 basis points, effectively increasing borrowing costs throughout the economy.

In his speech, Das said that while the RBI was mindful of the impact of higher interest rates on output, sustained high inflation and de-anchoring of inflation expectations would be detrimental to growth.

Here are a few key takeaways for markets from the RBI Governor’s statement today:


With the repo rate now at 4.40 per cent and the Standing Deposit Facility at 4.15 per cent, banks can now avail of a higher rate for surplus liquidity parked with the RBI. Banks will then accordingly demand a higher rate for funds lent out to borrowers.

The surge in government bond yields will also translate into higher cost of funds as sovereign debt is the benchmark for pricing a vast variety of credit products.

“MPC’s proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired. The above 1,000 point crash in Sensex has soured the sentiments on the opening day of India’s largest IPO. The 10-year bond yield has spiked to above 7.39% indicating an imminent rise in the cost of funds,” Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

As banks pass on their increased cost of funds to borrowers, loans – and therefore cost of capital for firms -are set to get dearer. EMIs for loans, including home loans, would rise too.


In line with its decision to focus on withdrawal of accommodation, the RBI announced a hike in banks’ Cash Reserve Ratio requirement to 4.5 per cent from 4 per cent earlier.

The move will have a liquidity impact of Rs 87,000 crore, Das said.

The CRR is a percentage of banks’ net demand and time liabilities, which is a proxy for deposits. A higher CRR therefore means a reduction in the quantum that banks can lend out and consequently higher lending rates.

Banks are also mandated to maintain a portion of deposits in highly liquid assets such as government bonds under the Statutory Liquidity Ratio. The SLR currently stands at 18 per cent of NDTL.

“The simultaneous 50 bps CRR hike would tighten liquidity (By Rs.90,000 crore immediately), which would improve the transmission of rate hike in credit and debt market. We expect an immediate increase in money market rate, some transmission in the long-term bond market and also credit market (both lending and deposit rates). The impact on the equity market is likely to be negative in the short-term,” Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers said.


“…The risks to the near-term inflation outlook are rapidly materialising, as reflected in the inflation print for March and the developments thereafter. In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects,” the rate-setting panel said.

Analysts expect the repo rate to be raised by around 60-75 basis points more by the end of the current financial year, given the RBI’s warnings of significant upside risks to the inflation trajectory.

As bond yields head even higher from current levels amid a rate hike environment and a massive government borrowing programme, equity valuations stand to be eroded while cost of capital heads up even further.

“We feel by the end we should be closer to 5.15% – June 2023 (the repo rate). 10 year yields reacted heavily and reached close to 7.40% and we may see more hardening since fresh supply may also come soon… Equity markets went into bloodbath post hikes since it’s a double whammy for companies (increasing costs across inputs and now in interest rates),” Abhishek Goenka , Founder CEO IFA Global said.


While acknowledging the significant pressures on the inflation front, the RBI did, however, sound a bit more confident on growth.

“The rebound in domestic economic activity that took hold with the ebbing of the Omicron wave is turning out to be increasingly broad-based. Private consumption is regaining traction on the back of recuperating contact-intensive services and rising discretionary spending,” Das said.

The headwinds from higher cost of capital notwithstanding, an uptick in demand and a hopeful easing of inflationary pressures should aid revenue streams for certain sectors.

“The interest rate hike amidst rising input costs is expected to have its impact on real estate…the monetary policy stance is still accommodative and with the receding pandemic and economic growth, we expect that consumer demand will remain buoyant in the near term,” Gulam Zia, Senior Executive Director- Knight Frank India said.


Leave a Reply

Your email address will not be published. Required fields are marked *