February 6, 2023

Explained: Why RBI didn’t hike rates for 10th time in a row and what it means for you – Times of India

The Reserve Bank of India left key interest rates unchanged for a tenth straight meeting, retaining an accommodative stance amid the threat of the Omicron variant. It believes India’s economic recovery is still incomplete and needs continued policy support.
Repo and reverse repo rates remain unchanged at 4 per cent and 3.35 per cent, respectively, said RBI governor Shaktikanta Das.
The repo rate is the rate at which the central bank lends to commercial banks and reverse repo rate is the rate at which the RBI borrows money from the banks in the short term to suck out the excess liquidity in the system.
Analysts had expected the RBI to raise the reverse repo rate by about 15-40 basis points. But instead, RBI decided to “continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.”
The MPC voted unanimously to maintain the status quo on the repo rate and by a majority of 5-1. The last time the Reserve Bank of India slashed the repo rate was in March 2020 by a total of 115 basis points (bps) to soften the blow from the pandemic and tough containment measures. The rate is now 250 bps below its level at the beginning of 2019, when the easing cycle began.
“Contrary to many central banks, RBI acts dovish and kept interest rates unchanged with an accommodative stance. There were expectations that RBI may hike the reverse repo rate and may change its stance to neutral from accommodative in tandem with hawkish global central banks amid rising inflation but RBI continued with its existing stance. RBI believes that inflation will peak out soon and there is a need for continuous support to the economy” said Parth Nyati, Founder, Tradingo.
So, why did the RBI not hike rates even though some economists had expected it do so?
The global economy concern:
The RBI believes that the rapid spread of the highly transmissible Omicron variant since December 2021 and the associated restrictions have dampened global economic activity. The global composite purchasing managers’ index (PMI) slipped to an 18 month low of 51.4 in January 2022, with weakness in both services and manufacturing.
Even though trade continues to grow, challenges persist due to container and labour shortages as well as elevated freight rates.
In its January 2022 update of the World Economic Outlook, the International Monetary Fund (IMF) revised global output and trade growth projections for 2022 downward to 4.4 per cent and 6.0 per cent from its earlier forecasts of 4.9 per cent and 6.7 per cent, respectively.
“In a global environment rendered highly volatile and uncertain by diverging monetary policy stances, geo-political tensions, elevated crude oil prices and persistent supply bottlenecks, emerging economies are vulnerable to destabilising global spillovers on an ongoing basis. Thus, policymakers face daunting challenges even as recovery from the pandemic remains incomplete,” noted Das.
Financial markets are volatile:
Commodity prices are once again rising, which has accentuated inflationary pressures. Now that several central banks across the world are focused on policy normalisation, including ending asset purchases and earlier than expected hikes in policy rates, markets have become volatile.
“Sovereign bond yields firmed up across maturities and equity markets entered correction territory. Currency markets in emerging market economies (EMEs) have exhibited two-way movements in recent weeks, driven by strong capital outflows from equities with elevated uncertainty on the pace and quantum of US rate hikes. The latter also led to an increasing and volatile movement in US bond yield,” noted the RBI.
The crux: “The global macroeconomic environment is characterised by deceleration in global demand in 2022, with increasing headwinds from financial market volatility induced by monetary policy normalisation in the systemic advanced economies (AEs) and inflationary pressures from persisting supply chain disruptions. Accordingly, the MPC judges that the ongoing domestic recovery is still incomplete and needs continued policy support,” said the RBI.
Domestic economy concerns: The RBI is still uncertain about a broad-based recovery because private consumption and contact-intensive services are currently still below below pre-pandemic levels.
Weak demand: Due the fast spread of the Omicron variant, demand has weakened in January 2022, even in rural India. For instance, two-wheeler and tractor sales contracted in December-January while amongst the urban demand indicators, consumer durables and passenger vehicle sales contracted in November-December on account of supply constraints while domestic air traffic weakened in January under the impact of Omicron.
PMI contracted on a month-on-month basis: Even though manufacturing PMI stayed in expansion zone in January at 54.0, it did contract on a monthly basis from 55.5 in December 2021. Petroleum consumption registered muted growth and port traffic declined. While finished steel consumption contracted y-o-y in January, cement production grew in double digits in December. PMI services expanded on a yearly basis to 51.5 in January 2022, though the pace weakened from 55.5 in December.
Inflation is up but will moderate soon: Consumer price inflation edged up to 5.6 per cent y-o-y in December from 4.9 per cent in November. Even though food group registered a significant decline in prices in December, primarily on account of vegetables, meat and fish, edible oils and fruits, the sharp adverse base effects from vegetables prices resulted in a rise in y-o-y inflation. Fuel inflation eased in December but remained in double digits. Core inflation or CPI inflation excluding food and fuel stayed elevated, though there was some moderation from 6.2 per cent in November to 6.0 per cent in December, driven by transportation and communication, health, housing and recreation and amusement.
The RBI expects inflation to moderate in the first half of 2022-2023, proving room to remain accommodative.
“Timely and apposite supply side measures from the Government have substantially helped contain inflationary pressures. The potential pick up of input costs is a contingent risk, especially if international crude oil prices remain elevated. The pace of the domestic recovery is catching up with pre-pandemic trends, but private consumption is still lagging. COVID-19 continues to impart some uncertainty to the future outlook,” said the RBI.
Homebuyers can rejoice as home loan rates will continue to remain low
In the absence of the specific demand-side interventions from the Budget 2022-23, prospective homebuyers can continue to benefit from lower home loan interest rates which are here to stay for now. “With this move, consumers and home buyers will continue to enjoy decade low interest rates prevailing from past few months,” said Dhaval Ajmera, Director, Ajmera Realty & Infra India
” The Housing market has been showing a healthy bounce back from the Covid crisis and low interest rates will help in improving affordability and sustaining the growth momentum. The sustenance of housing market recovery will have a strong multiplier effect on overall economic growth” said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
What does this mean for markets?
Bond markets are rallying
As a result of the accommodative stance, the bond yields have fallen, and the bond markets are rallying, leading to market profits for the banks and banking and housing finance companies rallying. “There is a cheer from the market in all quarters right now, which is a big positive, but with all major global central banks turning neutral from dovish, market participants would closely monitor this move by the RBI to see if they are falling behind the curve,” said Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor.
Markets are reassured
It is quite reassuring for stocks that RBI has continued with an accommodative stance and kept the inflation estimate at its current level. In response, the BSE Sensex and the NSE Nifty shot up. Gains in financial, IT and metal shares pushed the headline indices higher, though losses in auto, FMCG and pharma stocks limited the upside.
” The interest rate-sensitive stocks like banks, real estate, and autos will be the biggest beneficiaries. Overall very positive in an environment where rates are rising globally. With the omicron worry also behind us, we expect that some kind of reverse taper tantrum will play out in the Indian stock market,” said Abhay Agarwal, Founder, and Fund Manager, Piper Serica.
In a global environment rendered highly volatile and uncertain by diverging monetary policy stances, geo-political tensions, elevated crude oil prices and persistent supply bottlenecks, emerging economies are vulnerable to destabilising global spillovers on an ongoing basis. Thus, policymakers face daunting challenges even as recovery from the pandemic remains incomplete.
With inputs from Reuters

Leave a Reply

Your email address will not be published. Required fields are marked *