Below is the views on today’s RBI Policy meet By Mr. Arvind Chari – Head – Fixed Income, Quantum Advisors.
RBI Holds; Tightens Stance
In a surprise move, RBI held the Repo Rate at 6.5% as against the expectations of increasing it by 25 to 50 bps.
We were expecting a 25 bps hike with a neutral stance
The RBI has instead held the rates steady but changed the stance to ‘calibrated tightening’.
The RBI is likely sending a message to the markets that they won’t use interest rates as a currency defense and thus have not hiked but at the same time to maintain its inflation credibility they have tightened the stance.
In July 2013, post the taper tantrum, the RBI had hiked interest rates sharply, which further depressed sentiment and led to a sharper sell off in bonds, equities and currencies. With this pause, at a time when the Indian rupee has sold off sharply and markets expectations were riding high on a 50 bps rate hike, the RBI seems to be signaling that they don’t yet see the reason to panic on the external front.
We do see reason as inflation, especially food inflation, which continues to shoot below RBI projections and the previous two pre-emptive hikes does ensure that the policy rate is ahead of the current inflation trend.
Indian bond yields are already high enough for foreign investors to invest and a rate hike at this stage would not have achieved much from a transmission perspective.
However, given the trajectory of oil prices, if it stays at the current levels or moves up further, we may see the RBI hiking rates in the forthcoming policies. We expect Repo rate to move up to 7.0% from the current level of 6.5%.
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