Moneycontrol Pro Panorama | Market reaction to MPC moves temporary

There is dissent within the MPC on policy direction, with two members saying front-loading rate hikes could hurt the nascent economic recovery.

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Interest rate impact is no longer what it used to be. Historically, rising interest rates would have affected rate-sensitive businesses such as real estate and automobiles, but that no longer seems to be the case.

Both real estate and automobile sales have touched new highs in India in FY23 despite a rising interest rate environment. While analysts are baffled by the strong demand in the economy, markets are affected by high interest rates.

Funds have moved from equity to debt markets, both directly and indirectly. New account openings have slowed while mutual funds investment in equity schemes has fallen.

But this trend may change soon. The MPC is expected to either pause the rate hikes or announce a modest 25 basis point hike while changing its stance to dovish.

Rajrishi Singhal says MPC will settle for a 25-bps rate hike in the worst-case scenario. He argues that the decision won't be an easy one as there is dissent within the MPC on policy direction, with two members saying front-loading rate hikes could hurt the nascent economic recovery.

Chruchil Bhatt, on the other hand, expects the RBI to take a pause and the forward guidance may be open-ended. He says rate hikes, subsidies, and price caps are temporary and symptomatic fixes to structurally high inflation. This is not to suggest that the RBI should look to ease monetary conditions, but that given enough time, existing monetary policy is already restrictive enough to address our current inflation situation.

Though the consensus is tilting to a cautious decision by RBI, most agree that this will be the last rate hike by the central bank.

A rate pause or a reduction in the policy rate will help growth in all rate-sensitive sectors like real estate, consumer finance, automobile, and housing finance, among others. But the bigger beneficiary will be the market as a whole.

Fund inflows in the market have slowed since the market top on December 1, 2022. Within the market, the rate-sensitive stocks and companies with high debt on their balance sheet will see some immediate traction. Any reaction of rate changes on the market will be temporary as a large part of the movement will continue to depend on global market trends, given the uncertainties worldwide and rising volatility.

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Shishir Asthana
Moneycontrol Pro