Shakti’s Gati on interest rate hikes to continue
- Experts expect the
RBIto deliver a couple of more 50 bps rate hikes during the course of this fiscal year. Inflationcontinues to trend above the RBI’s comfort level with its year-end target at 6%.
- As real interest rates continue to be below inflation levels, RBI will be forced to hike repo rate further from the current 5.4%.
Given that inflation continues to above the central bank’s targeted upper tolerance band of 6%, rate hikes are expected to be front-loaded. Clearly, 50 basis point rate hikes are the new normal.
While this is good news for depositors, who will earn more from fixed income instruments, borrowers will, unfortunately, pay more. Economists and fixed income experts at mutual fund houses expect the RBI to deliver a couple of more 50 bps rate hikes during the course of this fiscal year.
Why are interest rates negative?
The central bank has been battling a Black Swan events like the Russian invasion of Ukraine and its consequent impact on prices of products ranging from base metals, crude oil to edible oil.
While prices of several commodities have cooled down, given that real interest rates continue to be negative, the central bank will continue to increase rates to suck out liquidity from the system to curb prices.
Interest rates are considered to be negative when inflation is higher than interest rates, which means that your money is losing value when you keep money in banks as deposits. Interest rates are positive when the benchmark interest rates are higher than inflation.
The central bank during the pandemic cut interest rates by 115 basis points, with the key repo rate dropping to 4%. This made loans significantly cheaper for borrowers till the middle of this year. But this cycle is now set to turn, making loans of all kinds more expensive.
Given that repo rate is at 5.4% and inflation estimate is at 6.7%, the RBI will have to deliver several more rate hikes to take the policy rates even to neutral territory if not positive.
Akhil Mittal, senior fund manager-fixed income,
“The endeavour to get real rates in positive territory, as mentioned earlier by RBI, gets closer with this move and we expect another 50-bps rate hike by MPC over next couple of MPC meetings before the pause,” he says.
Typically when interest cycle turns, growth often comes under pressure as higher prices tend to dent demand and higher inflation expectations prevent companies from undertaking capital expenditure. But in this cycle, the RBI does not expect growth to be impacted and has retained the GDP forecast at 7.2% for FY23.
AdvertisementSays Nilesh Shah, group president and MD, Kotak Mahindra Asset Management Company, “The RBI’s hike of 50 bps in repo rate is front-loaded to ensure that easing inflation comes below RBIs upper band of 6% by the fourth quarter of FY23. Since growth is becoming broad-based and private capex is showing signs of revival, the RBI has front-loaded repo rate hike to control inflation.
Interestingly, the RBI has kept the Indian economy flying high (7.2 % GDP growth in FY23) through turbulent weather. The RBI has clearly differentiated itself vis a vis many other central banks which are looking to hard land their economy (recession in FY23) to bring down inflation.”
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