The surprise increase in policy rates by the Reserve Bank of India (RBI) has forced economists and bankers to recalibrate their assessment of the inflation forecast and further rate cuts this year.

“We expect another 50-75 basis points (bps) rate hike during the year with another increase in the June policy. We expect RBI’s CPI projection to go for another round of upward revision. Our CPI forecast is at 5.5-6 per cent, with a clear upward bias towards 6 per cent. Next, all eyes will be on Fed, which is expected to go for a 50 bps rate hike,” said Dipanwita Mazumdar, economist at Bank of Baroda.

Since April, when RBI decided to stay put on rates, the major factor which was incorporated to the central bank’s current reaction function has been the current inflation print. Headline CPI shot up to 7 per cent (against the market consensus of 6.4 per cent).

Aggressive rate hike cycle

“The curious aspect is that it (rate hike) comes a month after the policy announcement ... Quite clearly the RBI believes the inflation threat is serious and as the economy appears to have settled in a stable state, notwithstanding the global disturbances on balance higher inflation is a bigger threat. High inflation has the potential to affect consumption and in turn investment,” Mazumdar said.

Coming ahead of the US Fed announcement, the RBI has taken the lead for the time-being after being blamed for being behind the curve.

”The rate increase by puts in place a pre-emptive “traditional defence” for the rupee against capital outflows as global monetary policy tightens. The sharper-than-expected rate increase paves the way for a more aggressive rate hike cycle than we earlier expected. The renewed focus on inflation (and rising inflationary risks) makes a case for a higher terminal policy rate in this rate cycle. We expect three more rate hikes in this fiscal with the repo rate likely to end the year at 5.15 per cent,” said Abheek Barua, Chief Economist, HDFC Bank.

‘Strong message’

Uday Kotak, MD and CEO, Kotak Mahindra Bank, said: “It was pretty clear that the wolf of inflation is getting more entrenched. And therefore, there was clearly a need to move. And I compliment the RBI for having the courage to take this call between policies. I read this as a very strong message by the RBI that they’re taking the point on inflation and inflationary expectations seriously.“

Prasenjit Basu, Chief Economist, ICICI Securities, said the whole structure of interest rates will harden, implying that loans will be costlier and fixed deposits more attractive. “The equity markets will take a negative hit, especially since this was a surprise inter-meeting hike. We were expecting a hike at the next MPC meeting after the hawkish hints at the last MPC meeting a month ago, but today’s move was larger and earlier than expected,” Basu said.

Umesh Revankar, Vice Chairman & MD, Shriram Transport Finance, said: “We had expected the RBI to hike rates from second half of the fiscal and hence the timing and quantum of RBI repo rate hike by 40 bps and hike CRR by 50 bps mid-cycle was a bit of surprise.

“We believe that the lending rates may go up gradually, and since there is enough liquidity in the system, our borrowing cost may go up only gradually ... I still believe that the economy is recovering and growing, and I don’t think a 40 bps rate hike will dampen demand.”

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