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A few days ago, the US Fed hiked rates by an aggressive 75 bps and yesterday the Bank of England raised rates by 50 bps. And that pretty much indicated the RBI’s decision today – aggressive and decisive.

RBI hiked the rate by, as expected, a 50 bps with immediate effect; aggressive but much needed to tame the wild inflation. RBI also decided to focus on withdrawal of accommodation to keep inflation within target while supporting growth.

Thus post the hike today, repo rate is at 5.4%; MSF rate and bank rate stands at 5.65% and SDF adjusted to 5.15%.

The rationale behind the rate hike and withdrawal of accommodative stance:

  • Inflationary pressures are broad-based and core inflation remains at elevated levels,
  • Volatility in global financial markets is impinging upon domestic financial markets leading to imported inflation
  • Inflation expected to remain above the upper threshold in Q2 FY23 and Q3 FY23

This apart RBI also set targets for GDP and Inflation.

GDP targets:

  • FY23 retained at 7.2%
  • Q1FY23 at 16.2%
  • Q2FY23 at 6.2%
  • Q3FY23 at 4.1%
  • Q4FY23 at 4%
  • Q1FY24 at 6.7%

Inflation (CPI) targets:

  • FY23 at 5%
  • Q1FY23 at 7.1%
  • Q2FY23 at 7.1%
  • Q3FY23 at 6.4%
  • Q4FY23 at 5.8%
  • Q1FY24 at 5%

Many are of the opinion that after today, RBI will take a pause but it will be on the basis of incoming data as the global and macro data is very dynamic, fast changing and uncertain. RBI did not give any preset policy path but the only signal was for anchoring the inflation. What we also noticed is that watching the rupee movement vis-à-vis the US dollar is also a priority currently and we could see RBI stepping in consistently as and when the rupee depreciates.

In other measures, RBI also proposes to allow standalone primary dealers (SPDs) to offer all forex market-making facilities as permitted for Category-1 authorised dealers. It also allowed SPDs to deal in offshore rupee overnight index swap market.

RBI also proposes to allow cross-border inward bill payments wherein NRIs can now pay bills for family members in India through Bharat Bill Payment System.

Given the fact that capacity utilisations are robust, it is unlikely that these rates hikes will impact growth; what we are seeing now is just withdrawl of all the sops which were given during the Covid times; the rates were brought down to deal with an emergency and with that now dissipating, its but natural we go back to normalcy.

Bottomline for us – will the banks give us more now on the FDs? Well, it’s a given that EMIs will go up quickly and for FDs, there is bound to be some transmission but whether it will be as aggressive and thus attractive for us, we have to wait and see. With a huge percentage of the elderly and middle income group investing in FDs for regular source of income, this is what RBI policy ultimately boils down to.

Markets? They have given up the gains of the morning but remain in the green; listless and volatile – that’s how we see it till global macro factors settle. Next week’s CPI number for July will be the next most watched macro factor.

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