Indian stock markets rose, the rupee strengthened and bond yields rose after the Reserve Bank of India hiked repo rate to pre-covid levels. The Reserve Bank of India (RBI) raised the key policy repo rate by 50 basis points while Governor Shaktikanta Das remained optimistic about domestic growth. He said that the domestic economic recovery is getting more broad-based despite a lot of uncertainties on the global front.
The Sensex was up over 250 points while Nifty hovered near 17,500 levels. Srikanth Subramanian, CEO-Designate, Kotak Cherry, said” Equity markets had already discounted the hike and therefore didn’t hamper the overall sentiment of the market. However with several headwinds and not so cheap valuations of the Indian market, investors should remain cautious on the equity market and not react to every move in market.”
The Nifty Bank index was up 1% and holding above 38,000 levels. Naveen Kulkarni , Chief Investment Officer, Axis Securities, said: “Repo rates reverted to pre-pandemic levels, the highest since August 2019. We have seen system liquidity tighten since RBI started withdrawing excess liquidity, and system credit growth improved to 14%. With credit growth looking up, we believe the banks with a higher share of floating rates and a robust CASA-led deposit franchise should be placed well in this increasing interest rate environment. While the domestic inflationary pressures seem to be easing out gradually, the geopolitical tensions, volatility in global financial markets, and emerging risk of the global recession continue to remain key risks.”
Indian rupee today rose to 79.23 per US dollar as compared to previous close of 79.47. “Overall the policy was a little more hawkish than expected. Further calibrated monetary policy tightening is likely to contain inflationary pressures. On the regulatory front a key development was to permit Primary Dealers to act as market makers in forex markets. The move is intended to broaden forex market participation,” said IFA Global Research Academy.
The RBI governor Shaktikanta Das while announcing the monetary policy said the central bank remains watchful and focused on maintaining stability of the Indian rupee. “During the current financial year (up to August 4), the US dollar index (DXY) has appreciated by 8.0 per cent against a basket of major currencies. In this milieu, the Indian Rupee has moved in a relatively orderly fashion depreciating by 4.7 per cent against the US dollar during the same period – faring much better than several reserve currencies as well as many of its EME and Asian peers. The depreciation of the Indian rupee is more on account of the appreciation of US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. Market interventions by the RBI have helped in containing volatility and ensuring orderly movement of the rupee,” he said.
Indian government bond yields rose today after the central bank raised its key policy rate by 50 basis points to tame high inflation. The RBI also kept its both inflation and GDP growth outlook steady. The 10-year bond yield was at 7.2588%, rising from 7.1073% earlier in the day. The MPC retained its GDP growth projection for 2022/23 at 7.2%, while its inflation forecast remained unchanged at 6.7%.
Analysts say though the RBI did not increase the inflation forecast, the tone was tilting towards the hawkish side.
“MPC today unanimously decided to hike Policy Repo Rate by 50 bps and persist with the policy stance of “withdrawal of accommodation”. The MPC took comfort from the broad basing of domestic growth impulses, while keeping its FY23 GDP growth projection unchanged at 7.2%. Despite the recent moderation in global commodity prices, MPC has retained its FY23 inflation projection at 6.7%. Given the global recessionary backdrop and its accompanying disinflationary impact, we believe policy rates in India will peak tad below 6% in this calendar year. In light of the same, further rate actions will be more calibrated and data dependent. Yield on benchmark 10-year Government Bond is expected to remain in 7.10-7.40 band in the near term,” said Churchil Bhatt, Executive Vice President, Debt Investments, at Kotak Mahindra Life Insurance Company.