RBI hike reflects desire to send anti-inflation message

Terming the RBI's move to hike key policy rates by 50 basis points as higher-than-expected, experts said the apex bank's action reflects the desire to send an anti-inflationary message to the market and added that another 25 basis points rate hike may be on the cards. 

The RBI today hiked short-term lending and borrowing rates sharply by 50 basis points for the third time in three months to tame high inflation.

"Market expectation was that in its quarter monetary review policy, the RBI would hike policy rates up to an extent of 25 bps and the system had accordingly prepared itself to absorb it, but raising the rate by 50 bps could be extremely unpleasant for the economy as a whole and market especially," SMC Group CMD Subhash C Aggarwal said.

Expressing a similar sentiment, IIFL Economist Ashutosh Datar said, "RBI's action to raise policy rate by 50 bps was against market expectation of 25 bps, which reflects the bank's desire to send a strong anti-inflationary message to market participants. We expect another 25 bps rate hike and a
pause thereafter to gauge the evolving growth-inflationary dynamic."

Experts said the 50 bps rate hike is a bit surprising, but it clearly reflects that for the RBI, the focus remains on tackling inflation.

"Loans such as home, auto, education, personal finance and a host of others will now go beyond the reach of salaried class, since interest rates are bound to go up substantially, reflection of which would be widely seen in overall profitability of second quarter results of banks," Aggarwal said.

"After today's rate hike, I think the central bank is now likely to pause on rates for rest of the current fiscal year, as there are signs of a slowdown in growth," CNI Research CMD Kishore P Ostwal said.

Following the rate hike, the BSE benchmark index Sensex tanked by over 300 points to 18,527.47 in late afternoon trade.

"The policy remains unexpectedly hawkish, despite noting the risks to growth and mentioning managing growth as one of the objectives of monetary stance. Thus, growth blues might deepen," Motilal Oswal Financial Services CMD Motilal Oswal said.