The Reserve Bank of India’s decision to leave the repo rate unchanged was seen as a surprise move by bankers who believe that it will support growth. However, they expect more monetary tightening in the coming quarters.

State Bank of India

“The RBI decision to keep the policy rate unchanged while changing the stance to calibrated tightening seems to be dictated purely by a benign inflation trajectory and considering the rising uncertainty in global markets, possible weakening in global trade and financial stability considerations,” said Rajnish Kumar, Chairman, State Bank of India.

Kumar also welcomed the proposed Voluntary Retention Route (VRR) for FPI participation in corporate bond markets on a long-term basis, and said it will add depth to the market by broad-basing participation.

Bank of India

Dinabandhu Mohapatra, Managing Director and CEO, Bank of India, said the RBI decision to maintain status quo on rates shows its view on softened retail inflation in recent months.

“The RBI policy sends signals for supporting growth in the near term, while the policy action is expected to alleviate the liquidity concerns among market participants,” he said.

The RBI, in its fourth bi-monthly policy this fiscal, changed the policy stance to ‘calibrated tightening’, and also lowered its inflationary projections from the August policy. It also underlined the ‘legislated’ mandate of the Monetary Policy Committee, which is to target retail inflation at 4 per cent with a band of 2 per cent.

B Prasanna, Group Executive and Head, Global Markets Group, ICICI Bank, said that the RBI has clearly indicated that interest rates, as a tool, is primarily meant only for the purpose of inflation targeting and not for currency defence.

“We do feel that more rate hikes would be required, going ahead, based on global market developments and our own projection of the inflation trajectory,” he said.

Global headwinds

However, bankers also highlighted rising global headwinds and volatility in foreign exchange markets, even as the rupee breached the 74-mark against the US dollar on Friday.

“While the hold in rates could bring some cheer for the bond market, the forex markets would clearly be disappointed, given that expectations were running high,” noted Abheek Barua, Chief Economist, HDFC Bank, adding that leaving policy rates unchanged could be seen as a series of steps to cap the cost of borrowing in the domestic markets.

“At this stage, the RBI seems to be okay with the 50-basis-point hike in this cycle and the simultaneous rise in interest rates in the wholesale market that has come so far,” he said.

Rating agency Crisil did not rule out an out-of-policy cycle rate-hike by the RBI if inflationary developments warrant, and said it expects a 25-basis-point rate hike this fiscal.

“The sharp depreciation in the rupee, the spurt in global crude oil prices, and the potential impact of MSP hike on food inflation do present upside risks to future inflation trajectory. Improving demand conditions are already reflecting in high core inflation,” it said.

Market impact

“The policy, on unexpected lines, is likely to take the market participants unawares in the short term,” said Arun Thukral, MD and CEO, Axis Securities.

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