RBI surprises markets by being chill about inflation
- RBI’s decision to keep the interest rates in the country unchanged was a booster for equity markets on Thursday.
- Sensex jumped sharply by 500 points as shares of banks, housing finance companies, automobile companies rose on expectation of strong demand due to low interest rates.
- However, analysts believe that the move is a temporary booster for the market as inflation worries will continue to remain.
AdvertisementThe Reserve Bank of India (RBI) gave an unexpected surprise to the equity markets on Thursday after it announced that it is not raising interest rates in the country.
To give you the context, the street was expecting an indication of a hike in interest rates or at least a minor hike in reverse repo rate to support the government’s large budget.
Reverse repo rate is the rate at which the central bank of a country borrows money from commercial banks within the country.
Since India’s Union Budget 2022-23 proposed larger capex to boost growth amid persistently high inflation, RBI was expected to raise interest rates in the country. The RBI move is contrary to other central banks in the world that are withdrawing emergency support two years after the COVID-19 pandemic caused widespread economic stress.
Keeping the broader view aside, markets focused on the decision to not raise interest rates, which means loan rates to remain at lower levels and benefit housing loan companies, banks, real estate companies and even vehicle manufacturers.
Analysts say that the RBI was largely expected to change its stance to neutral and the outcome came as a surprise. “While the RBI’s decisions came as a pleasant surprise for the markets, concerns remain over-aggressive Fed tightening [in the US], large government borrowings along with upside risks to inflation due to high commodity and crude prices,” said Jyoti Roy, equity strategist at Angel One.
|Top gainers on Nifty 50
|% change as of 2:20 p.m.
|Kotak Mahindra Bank
|SBI Life Insurance
Not to forget, markets have been under pressure for quite some time fearing the Fed would hike interest rates, which would eventually pull liquidity out from Indian equity markets.
“The outcome was more dovish [supporting lower interests] than most economists expected. Though the intent of the RBI to support the recovery in economy in the face of disruption due to Omicron variant is commendable, economists will now fear whether the RBI will fall behind the curve, having maintained the easy monetary stance longer than most other Central Banks had,” said Dhiraj Relli, managing director and chief executive officer of HDFC Securities.
Further, while equity markets have temporarily welcomed this decision, further the markets will be driven by “Q3 corporate results, outcome of state elections and changes in global risk appetite,” said Relli from HDFC Securities.
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