The Reserve Bank has projected retail inflation to ease to 5.3 per cent in next fiscal from 6.5 per cent this year on assumptions of lower imported inflation, even though core inflation remains sticky
The 25 basis points hike in key policy rate by RBI is in line with expectations, and hopefully is the last in the current cycle of rate increase which started in May 2022 in view of rising inflation, opined industry bodies and experts. It was the sixth hike in a row, though the quantum was low. The central bank has cumulatively hiked repo rate by 250 basis points since May last year in a bid to contain rising inflation in the wake of global geopolitical tensions.
"There is no doubt that moderating inflation in today's challenging global environment should be a priority for the RBI-Monetary Policy Committee and the RBI has done a commendable job with the result that the pace of price rise has reversed. "In line with the other broad objective of sustainable growth, we want to believe this is the last rate hike by the RBI," said Assocham Secretary General Deepak Sood.
The RBI raised interest rate by 35 basis points in December 2022. It was hiked by 40 basis points in May and by 50 basis points each in June, August and September. Commenting on the RBI policy, Madan Sabnavis, Chief Economist, Bank of Baroda said the major takeaway is that there will be a prolonged pause for sure before any further action is taken by the RBI and will be data-driven.
"Presently it looks like that there is an upside risk to the inflation number and hence a rate hike could be thought of later. A rate cut during the year looks more unlikely and can be on the cards only when there is a change in stance first," he added. Saket Dalmia, President, PHDCCI opined that the continuous increase in repo rate will have impact on consumption demand and production possibilities in factories.
"As inflation has been in a significant deceleration since the last many months, we look forward a pause in the policy rates," he added. The Reserve Bank has projected retail inflation to ease to 5.3 per cent in next fiscal from 6.5 per cent this year on assumptions of lower imported inflation, even though core inflation remains sticky. Experts also said repo rate is directly linked to loan rates offered by lenders so an increase in repo will increase the borrowing cost and vice-versa.
"The rate hike of 25 bps today will make EMIs expensive by approximately 2-4 per cent. Borrowers will either have to shell out extra money to repay their loans or will have to extend the loan tenure," said V Swaminathan, Executive Chairman, Andromeda Sales and Apnapaisa.com. Since May 2022, the repo rate has been increased by 250 basis points. So, the EMI for a 20-year home loan taken in May 2022 of Rs 70 lakh at 7 per cent was Rs 54,271, he explained. "But when we factor in the 250-bps hike since May, the interest rate becomes 9.50 per cent, increasing the EMI to Rs 65,249."
Radhavi Deshpande, President and Chief Investment Officer, Kotak Mahindra Life Insurance Company said having front loaded most of the rate hikes, incremental policy rate decisions will largely be data and global central bank stance related. Markets would settle for a longish pause here on than expect additional tightening and reversals in short period. "We expect 10 year G-Sec to hover around 7.25-4 per cent in the short term," Deshpande said. Bhavik Thakkar, CEO of Abans Investment Managers too said while this will increase cost of borrowing for all types of loan, the impact on home loan borrower this time could not just be extension of home loan tenor but higher EMIs also.
One of the things home loan borrowers should do is ask their lender to increase spread (difference between MCLR/RPLR for home loan companies and home loan rates offered to borrower), Thakkar said. Sumita Pillai, Chief Executive Officer of Torus Private Wealth too said the RBI move was in line with expectation.
"We expect the rate hike cycle to conclude as inflation has started showing signs of moderation and RBI has a clear focus on growth going forward," Pillai said.
Meanwhile, Sandeep Bagla CEO, TRUST Mutual Fund said the market is a tad disappointed as there was no change in stance from “withdrawal of accommodation” to neutral. He further said market forecasters are expecting inflation to trend lower from RBI projections. The RBI will release the minutes of the six-member Monetary Policy Committee meeting on February 22, 2023. The next meeting of the MPC is scheduled for April 3-6, 2023.