RBI Monetary Policy: Reaction to MPC Outcome by Market Experts

The Reserve Bank of India (RBI) has opted to keep key rates for the fourth time in a row, as was predicted. At 6.5 per cent, the repo rate is the same as it was under the liquidity adjustment facility (LAF). The six-member monetary policy committee (MPC), which is led by RBI governor Shaktikanta Das, maintained its 'withdrawal of accommodation' stance.

Since the beginning of the current fiscal year in April, the RBI has maintained the status quo after aggressively raising rates by 250 basis points overall between May 2022 and February 2023 to combat persistently high CPI inflation. As a result, the marginal standing facility (MSF) rate and the bank rate both continue at 6.75%, while the standing deposit facility (SDF) rate stays at 6.25%. Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shaktikanta Das are the six members of the MPC. Here are the experts reaction on MPC outcome.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers

The monetary policy statements in October 2023, as expected, maintained the status quo on all points. Contrary to common belief, the RBI did not lower its growth forecasts. According to the inflation projection, the RBI anticipates persistent headline inflation even in FY25. According to the RBI's inflation forecast, the real policy rate would be in the 100 to 150 basis point range in FY25.

This is consistent with the central bank's preference. As a result, a rate cut in the next 12 months is exceedingly unlikely. On the plus side, the governor expressed strong confidence that India will maintain strong growth and that inflation will continue to fall, albeit slowly. These forecasts are encouraging for both the equity and debt markets in the medium term. However, the strong possibility of the RBI remaining on hold for an extended period of time, as well as the continuance of liquidity tightening, is bad for interest-sensitive industries.

Radhavi Deshpande, President & Chief Investment Officer, Kotak Mahindra Life Insurance Limited

Monetary Policy Committee (MPC) kept rates and stance unchanged, hinting at a longish pause with a word of caution due to the state of global economy. As previously pointed out MPC's target inflation of 4% was explicitly mentioned yet again. MPC will remain data dependent and incremental actions by way of liquidity measures continues to be our base case. The 10 year bond is expected to settle slightly higher in the range of 7.15% to 7.35% following RBI's hint of OMO sales as the next liquidity tool after ICRR.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided unanimously to keep the policy repo rate unchanged at 6.50%, third time on the trot. The committee took comfort from falling core CPI inflation, and decided to persist with existing tightness of monetary policy to guide headline inflation to its 4% target. While the committee retained its FY24 CPI inflation projection at 5.4%, it continues to remain vigilant about the volatile food and energy prices. On the liquidity front, the Governor hinted at the possibility of using OMO sale operation, if required. Hence, while the policy outcome was largely in line with expectations, the possibility of OMO sale operations by the RBI will keep bond bulls in check till further clarity emerges. We expect 10-year benchmark government bond to trade in the 7.15%-7.35% band in the near term.

Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS

As expected, the RBI has maintained the status quo on policy rates. While growth has held up well, the focus will remain on containing inflation. The regulator has kept its growth and inflation projections for FY24 unchanged. RBI is expected to maintain the status quo on rates for longer and possibly consider rate cuts in H1FY25. All eyes will now be on the earnings season. Banks that have released their provisional numbers so far have sustained strong credit growth momentum. However, concerns around the quantum of margin compression continue to linger. Banks will continue to face headwinds on margins in this quarter as well, with some negative impact on NIMs owing to ICRR visible only during this quarter. Asset quality does not seem concerning at the moment, and lower credit costs would continue to support banks' earnings.

Radhika Rao, Executive Director and Senior Economist, DBS Group Research

Despite a pause, the RBI MPC's hawkish language suggests that price stability is questionable, and domestic financial conditions will remain tight. Policymakers are also mindful of the tight external financial conditions and narrowing (IN-US) rate differentials, notwithstanding the comfortable reserves cushion and impending foreign bond inflows. Post-decision, IGBs were under a cloud, as OMOs could be tapped for liquidity management.

Debopam Chaudhuri, Chief Economist of Piramal Group on MPC

RBI has been maintaining the policy rate at 6.5% for 8 months now. The longest transitory period in repo rate's history, when it was kept on pause prior to a cut, was 12 months, in 2014. This was followed by a 25-bps cut in an out of schedule meeting in Jan'15. A similar event cannot be ruled out this time, especially if the impact of food prices from lower kharif acreage does not impact RBI's forecast for overall inflation during the rest of FY24.

Sanjay Palve, Senior Managing Director, Essar Capital Ltd

The Reserve Bank of India's decision to keep the repo rate unchanged at 6.50% and maintain a 'withdrawal of accommodation' stance, today demonstrates a responsible approach to monetary policy and aligns with our expectations in this dynamic economic scenario. This constancy offers businesses a clear and stable monetary environment during a period of fiscal challenges and uncertainties. It's essential for boosting investor confidence and facilitating long-term strategic planning. This choice conveys a strong message of resilience and stability as we navigate the complex economic environment, supporting India's continuous efforts toward sustainable growth.

Vinod Nair, Head of Research at Geojit Financial Services

On a positive note, interest rates haven't increased as anticipated, however they are expected to remain elevated for an extended period. This will have an implication on rate-sensitive sectors like banking, auto, core industries, and heavy-weighted balance sheet companies. The elevated global bond yields and appreciation of the US dollar will affect the domestic economy and capital flows. However, it should not have a deep overhang effect on the economy but rather a mixed bias in the short term. The inclusion of government securities in the global bond index and moderation in inflation, like food & international commodity prices, will support INR and domestic corporate profit even in a volatile global currency market.

Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors

The RBI had overlooked data in the early aftermath of COVID since the aim was to stimulate the economy & engineer a turn-around. Since changing its stance last year, the RBI has been data driven. According to the RBI's inflation prediction for Q3 & this FY, today's policy outcome is not surprising. We expect the RBI to retain the status quo unless we see a durable drop in inflation and if steady economic activity continues.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services

A completely in line with expectations policy is neutral from the market perspective. Not only the policy rates but the growth and inflation targets for FY24 remain unchanged. More than this status-quo statement from the MPC, tonight's job numbers from the US will determine the market trend in the near-term. Rate sensitives like banks will start discounting the positive Q2 results expected in the coming days. The warning from the governor that the central bank will resort to OMOs to absorb excess liquidity if necessary has pushed the 10-year bond yields up marginally.

Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities

RBI kept the policy rates unchanged at 6.5%. There weren't any surprises in the Governors' statement. Sometimes no news is good news, which is why markets have reacted with a slightly positive bias. However, RBI too is worried about the global macro-economic environment. The global economy is slowing due to tighter monetary conditions. The yields have hardened and US Dollar has appreciated. There are signs that rates may have topped out but they are not going down in a hurry. It remains to be seen how the world adjusts to higher interest rates not seen in the last 22 years. Thus, RBI would like to play their shots carefully on an ever evolving turning pitch globally.

Manjit Singh. - Associate Partner at Alpha Capital - a SEBI-registered RIA

The central bank kept the repo rate unchanged at 6.50% and stance of 'withdrawal of accommodation'. Unlikely to have much impact on the markets since this is in line with the expectations of no changes from the recent stance. The hawkish policy statement is also on expected lines considering headline inflation could remain high for a longer period in India as well as globally impacting the growth.
Markets would now closely watch the data on the US monthly non-farm payrolls report expected tonight and if data comes strong the market will react negatively discounting further rate hikes. In contrast to global trends, domestic economic activity exhibits resilience on the back of strong domestic demand. So the near-term outlook is optimistic, however, stakeholders should keep a close eye on larger macroeconomic cues. Q2 earnings season will start soon and is expected to carry forward the momentum of previous quarters. Market movements ahead will depend upon a combination of global/local macros and earnings.

Anirudh Garg - Partner and Head of Research at Invasset

1. Inflation Outlook: With the RBI projecting uncertain inflation dynamics at 5.4% for FY24 and making specific quarter adjustments, they're clearly keeping a pulse on the economic variables. Elevated inflation can erode consumer purchasing power, potentially affecting sectors in the stock market like consumer goods, retail, and auto. However, assets such as gold and real estate, traditionally seen as inflation hedges, might stand out for investors.

2. Global and Domestic Factors: The challenges introduced by decreased kharif sowing and lower oil reserves could spell volatility for certain sectors. Agro-based industries and FMCG might be affected by potential raw material price hikes, while sectors such as oil & gas, aviation, and transportation could grapple with fluctuating fuel costs owing to global energy prices.

3. MPC's Stance: The vigilant stance of the MPC could signify potential policy adjustments, possibly in interest rates. In the stock market, this could mean short-term gains for the banking and financial services sectors from higher interest margins. However, high interest rates might soften demand in sectors reliant on financing, like real estate and auto.

4. GDP Projections: A steady GDP growth projection bodes well for investor sentiment. Sectors like IT, infrastructure, and manufacturing could witness upward trajectories, benefiting from optimistic GDP projections. The positive ripple effect could also be felt among small and mid-cap stocks.

5. Private Sector Activity: The increasing private sector capex indicates the corporate sector's confidence. This could positively influence the stock market, especially the capital goods, industrial, and manufacturing sectors. As these sectors burgeon, ancillary industries such as logistics and services could also benefit.

6. Government's Role: Active government support in investment could usher in favorable conditions for sectors like infrastructure, construction, and defense. Sectors targeted by government incentives, like renewable energy or electric vehicles, might also find their stock values appreciating.

Incorporating your sentiment: We at Invasset observe that the global financial realm seems to be aligning itself more with the Federal Reserve. The adage "never fight the Fed" has proven accurate in a majority of cases. The RBI's current trajectory is commendable, and India's growth potential seems primed to ascend at even higher rates as US inflation starts to ease. We're already witnessing the initial signs of inflation softening. Our optimism remains high, and we genuinely hope that no geopolitical events arise to challenge this positive momentum.

Suman Bannerjee, CIO, Hedonova

We are far from reaching the inflation target of 4%. Theoretically there should have been a rate hike but when you take a more nuanced approach, status quo is the smarter thing to do. India is facing some challenges, both internal and external. Kharif crop are being sowed and reservoir water levels are low, the monsoons are about to end and a lack of water leads to uncertain farm income during Basant Panchami next year. On the international stage, oil prices are volatile and $9 higher on average than last quarter. The rupee is the lowest it has ever been. Considering these, on the backdrop of high GDP growth, the status quo on repo rate is absolutely logical.

Anil Rego, Founder and Fund Manager at Right Horizons

Retail price inflation eased to 6.83% in August'23 from 7.44% the previous month which was the highest since April 2022. Wholesale prices dwindled by 0.52 per cent YOY in August 2023, compared to a decline of 1.36 per cent in July'23. The Monetary Policy Committee has maintained the status quo on the repo rate despite the headwinds from higher oil prices and erratic monsoons as inflation moderates in a resilient economy.
Since inflation is moderating, economic activity is steady and despite headwinds from oil prices as India is poised to be the growth engine for the global economy the markets were expecting the repo rate to be unchanged at 6.5%. We believe markets in the near term will now be driven by earnings season and growth during the festive season.

Markets have touched new highs, especially with earnings for the first quarter coming healthy supporting the trajectory. Investors are bullish as they are favouring rate cuts in 2024 which will unanimously boost the equity markets. The banking sector is the most sensitive to changes in rate cycles and has been a major reason for incremental earnings in FY23 and the first quarter of FY24 benefitting from the hikes and credit growth being robust and persistent. Prolonged rate cuts will eventually lead to narrowing NIM but we expect rate cuts to begin in the last quarter and hence the trend in the banking sector is likely to continue in FY24. NBFCs will be best positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand.

Gurmit Singh Arora, National President, Indian Plumbing Association

As expected, RBI kept the interest rate unchanged and maintained its accommodation withdrawal stance. RBI reiterated that India is poised to become a global growth engine with steady economic activities. However, the retail inflation is still above the comfortable zone of 4 percent due to erratic weather conditions and uneven monsoon this year. The high prices of vegetables and cereals don't seem to cool down anytime soon and RBI revised its Q2 retail inflation projection from 6.2 percent to 6.4 percent. The central bank has to align inflation to maintain the tempo of economic growth.

Subhash Goel, MD, Goel Ganga Developments

An unchanged repo rate is a festive bonanza for homebuyers, as it gives them another chance to buy homes at optimal costs. Based on current trends, the market for consumers appears quite positive with respect to housing markets which give an impression of the economy's prosperous health. Coming into the peak festive season quarter, we have high momentum in housing sales; an unchanged interest rate from RBI will play a significant role in spurring growth within the residential market. RBI's Repo Rate is the rate at which RBI lends money and it is an important instrument of monetary policy adopted by the RBI to control inflation and growth. For example, when the repo rates increase, banks have to pay more for borrowings from the RBI.

LC Mittal, Director, Motia Group

The pause will be beneficial for the real estate sector to sustain its current growth rate. The last three revisions fully passed in the form of a hike in the base lending rate. 250bps were in fact added to the repo rates so now it is 160BPS. It has begun to affect the demand for houses, particularly in the low-cost sector. Growth of the middle segment has also slowed down over the past few quarters. Higher REPO rate may also dampen buyer sentiments causing an impact on housing affordability. A change in the MPC rate can have a profound effect on the home loans. On the other hand if the MPC increases the repo rate, the commercial banks will have to pay more to borrow money from the RBI. This will be expensive because banks' costs of funds are likely to rise, and so will the interest rates on loans such as home loans. As a result, it means that banks have to pay higher costs of funds that consequently results in the rise of interest rates on all loans including home loans.

Sonam Srivastava, Founder and Fund Manager, Wright Research, PMS

In light of the recent announcements by the RBI, the decision to maintain the status quo on the repo rate underscores the central bank's commitment to ensuring macroeconomic stability amidst prevailing inflationary pressures. The unwavering focus on inflation and the emphasis on liquidity moderation signal a cautious yet proactive approach by the RBI, reflecting its intent to strike a balance between growth and stability.

Turning to the stock market, the immediate aftermath of the MPC meeting is likely to witness a mixed reaction. While the banking sector might experience some short-term volatility, especially if any further directives on liquidity or sector-specific guidelines are issued, the broader market might interpret the RBI's stance as a sign of confidence in the economy's resilience. Sectors closely linked to interest rates, such as real estate and automobiles, might also exhibit sensitivity to the RBI's announcements. However, the overarching sentiment remains that of cautious optimism, as the market digests the implications of the central bank's decisions and their potential long-term impact

Mr. Divam Sharma, the Founder and Fund Manager at Green Portfolio, PMS

We are seeing strong economic activity which is evident from some of the recent numbers of PMI in manufacturing and services, power demand, strong credit growth, robust GST collection numbers, strong consumption growth and auto numbers.
With food and energy prices being volatile, and RBI keeping vigilance to ensure an inflation target of 4%, we foresee rate cuts taking longer than expected.
A status quo is largely a non-event for the markets.

Sandeep Bagla,CEO, Trust Mutual Fund

Policy unchanged, guidance hawkish. The Governor has taken cognisance of rising US yields, higher oil prices and the need to maintain a tight monetary policy. Liquidity will remain tight and RBI may resort to OMO sales of its Gsec inventory to suck out excess cash. RBI also reiterated that the inflation target is 4% implying that Indian rates will remain higher, and may go higher and for longer. On balance, there is nothing for interest rate optimists in this policy from RBI.

Ravi Singhal-CEO, GCL Broking

As per RBI governor's statement, inflation can come down in September. As well as the infrastructure spending and industrial growth are visible. GDP growth same 6.5%. On core inflation will come down then only path visibility is clear. On the other hand, the next year is the election year so inflation will remain under control. Crude also comes down 16% from the top. This will also help in controlling core inflation. So bank nifty can go up to 50000 in this financial year. As also the budget is really also due.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

The RBI's decision to pause along with retaining the withdrawal of accommodation stance was in line with expectations. Importantly, the RBI has explicitly highlighted the need to use OMO sales to modulate liquidity. This will weigh down bond markets' sentiments. Concerns on food inflation were highlighted which can impart upside to headline inflation.

We believe that inflation risks remain on the upside given weather-related impact as well as commodity prices. Global monetary conditions will also weigh on RBI's policy decisions. The good part is that growth remains resilient and core inflation remains under check. We maintain our call for a prolonged pause on repo rate at 6.5% well into FY2025 while liquidity over the medium term will be aimed at being close to neutral.

Mr Edul Patel CEO of Mudrex- a global cryptocurrency investing platform

The RBI's Monetary Policy Committee has maintained the repo rate at 6.5% for the fourth consecutive meeting after a prior increase in February 2023. This decision is expected to result in minimal fluctuations in the equity market. Interest rate-sensitive stocks could gain momentum. Conversely, the fixed income and loan markets may not see immediate changes, with bond prices likely to remain stable due to the unchanged repo rate.

Anuj Puri, Chairman - ANAROCK Group

The unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimized home purchases. If we consider the present trends, the overall consumer market looks bullish across sectors, particularly the automobile and housing markets, which in many ways reflect the health of the economy. We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market.

As per ANAROCK Research, housing sales across the top 7 cities created a new peak in Q3 2023 (despite the usually slow monsoon quarter) and stood at 1,20,280 units as against over 88,230 units sold in Q3 2022, thus recording 36% yearly growth. Thanks to the stable repo rate and the resultantly stable home loan interest rates, we can expect the momentum to continue.

Anitha Rangan, Economist, Equirus

Despite global uncertainties which warrant close monitoring, RBI chose to keep the policy rate unchanged at 6.5% and maintain its "withdrawal of accommodation" stance. Surprisingly RBI has retained its inflation estimates for FY24 at 5.4% despite marginally increasing Q2 estimates to 6.4% (6.2%) and taking down Q3 to 5.6% (5.7%). FY 24 GDP growth rate remains unchanged at 6.5%.

Notably, RBI highlighted high inflation as the major risk to macro stability. The high inflation risk is emanating from volatile food and energy prices both domestically and globally, driven by geo-political factors and climate changes. While headline inflation is expected to moderate in the near term, RBI did cite that outlook uncertainty on food inflation comes from lower reservoir levels, lower sowing, and volatile global food and energy prices. The positive driver is that core inflation is softening and is critical for keeping the headline inflation lower.

Three statements from the policy give us a very hawkish outlook a) comment that tight global monetary stance could persist higher than expected b) food inflation pressures may not see sustained easing c) reserves position continuing to decline with the Sept-23 overall having seen ~$12 bn of decline to contain rupee volatility suggest that RBI is on a vigilant watch mode. While batting defensively on a turning pitch, RBI remains very careful. As long as currency is maintained long pause is the call. However, on a turning pitch, a surprise shot can emerge at any time.

Raghvendra Nath, Managing Director, Ladderup Wealth Management

In order to maintain the nation's strong growth rate, RBI was anticipated to leave the repo unchanged. Given the growing oil prices and the current global difficulties, the central bank has little reason to become more dovish at this point. The high-interest rates are here to stay for quite some time before we see any changes being announced by the central banks.

Shlok Srivastav, Co-founder and COO, Appreciate

While the RBI did sound a note of optimism in terms of what the future holds for India, overall, it's clear that the current uncertainty in the global environment is weighing on it quite heavily. Nevertheless, its prognosis that September inflation is likely to be lower is good news, as is its affirmed alertness when it comes to handling inflation expectations.

The RBI is undoubtedly going to need a fair amount of time to bring the inflation rate back to the ideal band. Global macro factors will play a key role in determining the timeline for this. However, for now, its maintenance of the retail inflation rate at 5.4% for 2023-24 looks like a positive sign. In addition, the 5.8% YoY rise in remittances in Q1 FY24 and the decline in the current account deficit to 1.1% of GDP is also heartening.

As usual, the market will be looking to the RBI's upcoming guidance for more specific cues.

Rishabh Siroya, Founder of Siroya Corp

The decision by the RBI's Monetary Policy Committee (MPC) to keep the repo rate unchanged at 6.5% is undeniably favourable news for home buyers. This move signifies stability and continuity in interest rates, providing much-needed relief and confidence to those aspiring to own a home. A steady repo rate translates into lower borrowing costs, making home loans more affordable. It not only encourages prospective buyers but also supports the housing sector's growth, ultimately contributing to the overall economic development. This decision showcases the RBI's prudent approach to balancing economic factors and fostering a conducive environment for individuals to achieve their homeownership dreams.