The RBI’s Monetary Policy Committee (MPC) surprised most market participants on April 6 after it decided to maintain status quo on interest rates after six back-to-back hikes, even as it reiterated that the war against inflation is far from over.
The rate setting panel also maintained the 'withdrawal of accommodation' stance, highlighting its readiness to act should the situation so warrant. An accommodative monetary policy is when central banks expand the money supply to boost the economy.
The MPC kept the repo rate, or the rate at which it lends short-term funds to banks, at 6.5 percent.
Equity benchmarks Sensex and Nifty, which opened in the red, darted up immediately after RBI Governor Shaktikanta Das announced the policy decision.
Analysts say the RBI’s move is expected to create a positive momentum for the market amid global headwinds.
“The RBI’s pause is like Sachin stroke on a tricky pitch but with eyes set in and having the luxury of hitting the ball wherever he wanted. The RBI had the option of a rate hike or a pause. The pause was not entirely unexpected,” said Nilesh Shah, MD, Kotak Mahindra Asset Management Company.
“The RBI will watch developments and data before taking the next call. The market expects the RBI to fetch maximum run and win the match on inflation and growth, no matter which direction they hit the ball,” he added.
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Sonam Srivastava, founder of investment advisory firm Wright Research, said the RBI’s decision is positive for the banking and NBFC sectors, and is expected to benefit other segments such as real estate and infrastructure as well. However, the persistent inflation and global banking crisis remain areas of concern.
“From a stock market perspective, the RBI MPC meeting's decision to maintain the repo rate unchanged is expected to create a positive momentum, especially for the banking sector. The focus on the gradual ‘withdrawal of accommodation’ is also reassuring for the market, as it ensures the sustainability of the economic recovery in the long run,” he noted.
However, the market will be closely monitoring any future announcements by the Governor regarding inflation and global banking instability, as they may impact the market's momentum, Srivastava further said.
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Sandeep Bagla - CEO, Trust Mutual Funds, said, "Nothing hawkish about the policy. RBI MPC has taken a pause, kept the repo rates unchanged, against majority market view. The stance remains unchanged at the enigmatic ‘withdrawal of accommodation’. We expect both GDP and inflation to be significantly below RBI year end estimate of 6.5% and 5.2% respectively.”
Interest rates are likely to soften considerably from current levels, Bagla said, adding that bonds will perform well this year generating capital gains over and above the coupon rates. Passive investments like fixed deposits will underperform debt funds.
Santosh Meena, Head of Research, Swastika Investmart Ltd, said the RBI astonished the market by pausing policy rates; nonetheless, there was some talk about this unexpected statement, which keeps it ahead of other major central banks across the world.
When symptoms of growing inflation first appeared, the RBI was one of the few central banks to begin raising interest rates. As a result, this RBI approach can be interpreted as an indication that global interest rates are about to peak, he added.
“The market is in a good mood, and this policy provides us with further cause to rejoice. However, given that we have witnessed a good recovery from recent lows and that we have a long weekend and a weekly expiry, some profit-taking or consolidation cannot be ruled out. The market's overall tone has changed to positive in the near term. If you have cash then sell, and buy in the future,” Meena advised investors.
“Technically, the crucial resistance levels for Nifty and Bank Nifty are 17,600 and 41,250, respectively. If they are successful in crossing over these levels, we can anticipate a move in the direction of the 17,770 and 41,650 levels; otherwise, some profit-taking is anticipated. On the downside side, immediate support levels are at 17,440 and 40,650. The texture is the buy-on dip,” he noted.
Tanvee Gupta Jain, Chief India Economist at UBS Securities, said after 250 basis points of rate hikes, the RBI has clearly highlighted that it will be looking at the lag impact of monetary tightening on both domestic demand as well as inflation.
She sees inflation softening “significantly” in March and further moderation over the next two months.
“Our baseline forecast… we are maintaining our view that after an extended pause, the next move will actually be a cut. We are not of the view that there will be more rate hikes…,” she added.
UBS Securities estimates a 50 bps rate cut by the RBI in the second half of FY24, based on a sharp Fed pivot which its US analysts are projecting.
Jaideep Iyer, Head - Strategy at RBL Bank, said short-term deposit rates have gone significantly higher than the 250 basis points repo rate hikes in the previous 11 months. So clearly it is sensible to wait out for the impact of the hikes.
He added the RBI pause comes as a relief to borrowers
“After the 250 basis points rate hikes, tenors have gone up for home loans quite significantly, and any rate hike from here on would largely translate into EMI increases. We had already seen demand kind of slowing down for home loans,” he added.
Iyer expects a longish pause from the RBI before there is a change in stance.
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