RBI hikes repo rate for third time: Here's what experts have to say

Mumbai (Maharashtra) [India], August 5 : The monetary policy committee of the Reserve Bank of India (RBI) has decided to raise the repo rate by 50 basis points to 5.40 per cent in order to contain the persistently high inflation. Today's hike takes the repo rate above pre-pandemic levels of 5.15 per cent.
Raising interest rate typically suppresses demand in the economy, thereby helping inflation to decline. India's retail inflation has been over the RBI's upper tolerance band of 6 per cent for the sixth consecutive month in a row now.
In line with the global trend of monetary policy tightening to cool off inflation, the RBI has so far hiked the key repo rate -- the rate at which the central bank of a country lends money to commercial banks -- by 140 basis points in three instances.
Here is what analysts and financial market experts had to say on Friday's monetary policy announcement:


We had expected the RBI to hike the interest rate by 25-35 basis points. However, it has hiked by 50 basis points. One of the reasons why the RBI has decided to act a tad aggressive in hiking the rate of interest is to protect the Indian currency.


Today's RBI MPC decision to hike the repo rate by 50 BPS is in line with the market expectations, thus remaining a non-event. This move and the change in stance from neutral to the withdrawal of accommodation were imperative to ease down the current scorching inflation.


We do not expect banks to pass on the current hike in interest rates, as they have already raised the lending rates, further hikes in lending rates could impact the gradual recovery seen in the economy in the post-pandemic period.


The current round of hikes could make the buyers apprehensive and they might as well adopt a wait-and-watch attitude. But on a positive note, the continued wage and job growth in varied sectors will provide a cushion in the short term for the purchasing decisions


RBI's decision to raise the repo rate by 50bps was on expected lines and in sync with rate hikes by global economies. Inflation has remained sticky for the past six months, but good monsoon progression, reducing global commodity prices, the government's intervention on taxes and duties, and frontloading of rate hikes mean inflation has likely peaked and will start trending lower.


We expect the pace and quantum of rate hikes to moderate going forward, led by falling commodity prices, global growth concerns, and easing global supply constraints.


There was no forward guidance on the rate trajectory going forward, however, we believe that with much of the front loading behind us and oil prices also easing, RBI will go for 15 basis points - 25 basis points hike in the next MPC meeting.


This may impact the cost of capital, however, an immediate impact on housing demand is not certain. There has been an increase in appetite for home ownership post the pandemic, and with the upcoming festive season, it might generally withstand the marginal changes in loan rates.


Going forward, if the domestic growth indicators show sustained improvement, the Central Bank could hike the repo rate by a further 50 bps in FY23. With the terminal repo rate at 5.90%, the RBI would be moving towards a positive real rate of interest.


Despite the recent softening of metal and crude oil prices in the global market, RBI has not revised its CPI forecast for the current year, which reflects that inflation continues to be a major concern.


RBI is looking to frontload the rise in interest rates to get ahead of global recession expectations and inflation outlook. It is heartening to note that input cost pressures are beginning to come down and even crude prices are moderating though still around USD 100 per barrel.
Likely transmission of another 30-40 bps increase in home loan rates may cause some mid-cycle slowdown for the residential sector and likely result in some ripple effect on the upcoming festive season.


The RBI move might have an immediate impact on home buying for the short term as the recent consecutive repo rate hikes have already added to buyers' overall acquisition cost. Rising interest rates along with elevated property construction costs and product price pressures could adversely impact the real estate sentiment when buyers are likely to invest in their dream homes foreseeing the festive season.