Rate Hikes Likely To Continue Feel Experts As Inflation Remains Stubborn

The Reserve Bank of India today hiked repo rates by 50 basis points, which was the upper end of the expectations. The tone of the RBI Governor sounded hawkish, with inflation continuing to remain a worry. Most economists and experts believe that there would be further interest rate hikes coming.

"While the RBI has not changed its GDP/inflation projections or its stance, it increased repo rates by 50 bps as CPI has been above RBI comfort level for months. RBI also wants to make sure that inflationary expectations do not entrenched. Yields went up by 15 bps on the 10 year segment. It is difficult to predict, specially about the future. We at TRUST MF, do not feel that it is the end of rate hiking cycle. There are strong and stubborn inflationary impulses in form of commodity prices and wage pressures which will go away with time and aggressive hikes. Rate hikes could be spread out such that there is minimal impact on debt funds's performance. The outlook for funds maturing up to 3 years is quite good, but the longer end funds could remain volatile for some time."

According to Rajiv Shastri, Director and CEO, NJ Mutual Fund, the hike was a bit sharper than we expected, but in keeping with the RBI wanting to stay ahead of the curve as far as inflation is concerned.

"We believe that this will allow the RBI some room to pause if the recent moderation in commodity prices was to sustain. With the monsoon going well and global food shipments resuming, food inflation is expected to moderate as well. All of this portends well for the Indian Markets," he says.

"Overall, RBI's action and statement today was not as dovish as we expected. Therefore, it is very likely that the terminal rate in this rate hike episode will be higher than our expectations. We, thus, revise it to 5.75-6% from 5.5% expected earlier," says Mr. Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services.

Nitin Bavisi, CFO, Ajmera Realty and Infra India Ltd says the quantum of the rate hike was on the upper end of the market expectations. "RBI retaining its GDP estimate for FY23 at 7.2% illustrates the relatively strong macro fundamentals of the Indian economy compared to advanced economies in the world.

What is important to note is that the inflation trajectory is expected to move below 6% by the fourth quarter of FY23. This augurs well for the consumption-led growth of the Indian economy in the long term. Though in the medium term, the inflation trajectory is expected to be above 6% in the second and third quarters of this fiscal year. RBI will continue its path of accommodation stance withdrawal to safeguard macro economic framework against the keep the inflationary pressures."