Sandeep Nayak, ED & CEO, Centrum Broking
The rate hike was not expected by most market players given that inflation both CPI and WPI was below expected numbers when released earlier this month. This is disappointing in the short term and the recovery of the rate sensitives may take a tad longer. However, structurally this move should help rein in inflation both CPI and WPI and therefore pave the way for easing in the second half of the next fiscal
Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance
RBI has hiked policy rates by 25bps as per the expectations, the stance has moved by a margin from growth concerns to worries on high core inflation. The move comes at the time when bond markets were stuck with volatile macro variables and new framework proposed by deputy Governor. RBI has indicated that at current level of repo rate they are comfortable to guide the system that as per their forecast of inflation for next 12months monetary stance will remain unchanged, RBI also indicated that if inflation drops below their expected path they may even ease in future. For bond markets this will be positive news as uncertainty on extent of hikes will be removed and if inflation does indeed fall sharply expectations on rate cuts will emerge.
We expect CPI & WPI inflation would drop significantly due to fall in food inflation, however sharp fall beyond range expected by RBI can’t be predicted with certainty and hence we expect bond yields will not be in a hurry to drift in either direction.
On external front, risk off sentiments have emerged again and rupee has deprecated accordingly however since fundamentals of economy have improved on relative basis rupee should not react sharply as seen in Q2, we expect RBI may not take any tightening measures to protect the currency.
Lakshmi Iyer, Chief Investment Officer (Debt) & Head – Products, Kotak Mutual Fund
The RBI hiked the repo rate to 8% from 7.75% contrary to consensus view. The forward guidance however has been a tad tamer where the RBI has indicated that if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture. The policy measure taken today seems to set the path for disinflationary process thereby reducing the need for further rate hikes in the near term. This should augur well for the markets which has in a way got some more clarity on the likely future course of action. We expect the bond yields to consolidate at the current levels.
Vivek Gupta, director research, CapitalVia Global Research
Although this move will be taken negatively in short term by the markets but market as most of the time discounts the sentiments in advance had a good correction since the beginning of this week. Most important thing which has to be seen as of now is Nifty spot should not close and sustain below 6125 because this is the level which was holding markets for a long time. If Nifty spot closes below this level then with the current sentiments of rate cut and global market weakening we may see a correction up to 6010 and 5900 on Nifty
Amar Ambani, head of research, IIFL
Although the RBI Governor’s decision to raise the Repo and MSF rate came as a surprise, in hindsight, it seems like the right move. WA rate hike of 25bps at this juncture was required to stem upside risks to the central banker’s CPI forecast of 8% by January 2015. In its recent policies, RBI has been laying more emphasis on CPI as an inflation benchmark. While there was no mention about the impact on the INR in RBI’s policy document, a hike in rates, does send a strong signal to the currency market at a time when emerging market currencies are weakening.
RBI also clearly mentions that further policy tightening in the near term is not anticipated if disinflationary process evolves according to its projections and that policy can only turn accommodative if inflation moderates at a pace faster than currently anticipated. In our view, this implies that a sustained fall in CPI below 8% becomes a pre-requisite for a change in policy stance. So while the rate cycle could have peaked it would take some time to turn downwards. As we now expect the pause to be a long one - we moderate our expectation of rate cut in FY15 to 50-75 basis points. Banks are unlikely to raise lending rates in policy response as the growth in deposits has been much higher than advances. From a stock market perspective, the commentary on economic growth would be worrisome where the Governor’s assessment is that growth is likely to lose momentum in Q3 of 2013-14.
Dinesh Thakkar, chairman & managing director, Angel Broking
In the backdrop of the Urjit Patel committee report, markets were at best expecting a status quo on rates with a slim probability of repo rate hike. The low probability assigned for a rate hike during this policy review was largely on account of a) food inflation cooling off considerably as compared to the previous few months and b) concerns over slow pace of growth. But the RBI has increased rates and the main rationale for this can be attributed to non food, non fuel CPI inflation remaining elevated. Further, global developments such as tapering by the Fed, fiscal policy tightening as well as the growth-inflation dynamics are likely to determine the policy stance going forward. I believe that the primary respite is expected from further moderation in food prices and further policy tightening is not anticipated. In case the trajectory for inflation decelerates as expected, the RBI is likely to gradually ease policy stance.