Reactions on RBI decision to increase repo-rate by 25 basis point

Mr.Nitesh Kumar CEO TDI Infracorp said, “Most of the inventories sold by real estate developers these days are mainly sold on easy home loan facilities and Subvention schemes as interest rates were going down over last one year. Most of the people living on rent were buying their own house as their EMI were equivalent to their monthly rent, now with announcement by RBI to increase repo rate by 25 basis point interest rate will go up . With real estate sector trying to overcome and was on revival mode this will definitely impact the momentum.”

Mr.Shishir Baijal, Chairman & Managing Director, Knight Frank India said, “The RBI’s stance of increasing the policy rate by 25bps is in line with our expectation considering that the crude oil flared inflation level and the interest rates in the broader economy have been marching higher for some time now. However, this increase in policy rate will delay the revival of the country’s housing market, which after suffering a prolonged period of slump has just begun to show early signs of improvement on account of uptick in affordable housing.”

Mr.Dinesh Rohira, Founder & CEO, 5nance.com said, “The monetary policy committee headed by RBI Governor in its second bimonthly meet hiked the repo rate by 25 bps from 6 per cent to 6.25 per cent along with rise in reverse rate to 6 per cent from 5.75 per cent. However, despite a rate hike it continued to maintain a neutral stance over medium term inflation target at 4 per cent within a band of 2 per cent upside or downside, and forecast GDP growth in the range of 7.5-7.6 per cent.” “The rise in core inflation rate along with weakening of rupee in recent period, and macro headwinds were the likely attributes for the current rate hike although it was anticipated in next meet. The recent trend however indicated a market already discounting the probable of rate hike by 25 basis points which is seen with upward movement in government bond yields, and substantial rise in corporate borrowing rate in recent period. In tandem with 25 bps rate hike, it is unlikely to cause major setback for the consumption driven economy by current hike. Although the cost of borrowings will marginally increase which is already factored in, consumer can also further expect a marginal revision on subdue deposit rates. Currently, consumers are at front end of growth trajectory over a soften industrial activity, and thus revision on other liquidity tools will act as impetus for the domestic economy which is beckon on consumption theme. Even if RBI exercise a further rate hike in current financial year, it is likely to consider consumer’s sentiment and growth trajectory to channel fair tradeoff for the end consumer through other liquidity tools.”

Dhruv Agarwala, Group CEO, Proptiger.com, Housing.com & Makaan.com said, “The decision by the RBI on increasing the key rates can be seen as an aggressive stance keeping in mind the medium – term target for CPI Inflation of 4 percent, while still aiding growth. A change in the key rates on either side would have affected the economy both in the short and long run. With the rates now going up, markets are expected to dip slightly but with the stability it has achieved in the past, it is expected to recover from the slump eventually. Added to that, the uncertainties and volatility in the global markets have added to the list of reasons for the apex bank to take this approach.”

Dhiraj Jain, Director, Mahagun Group said, “Looking at the market dynamics, we were projecting the RBI to maintain the status quo. Any increase in lending rate dampens the sentiments in real estate as the net cost on the buyer for the housing unit gets increased but with the market inflation not coming below the medium – term target and potential trade wars among more advanced economies of the world, the apex bank would have been compelled to take this step.”

Deepak Kapoor, President CREDAI-Western U.P. & Director, Gulshan Homz said, “The decision of RBI to increase the rates is a clear indication that the apex bank wants to have an aggressive approach in the upcoming two months. A sufficient cushion needs to be kept for the economy as the start of the financial year had been stable and more liquidity is expected to flood the market with REITs and InvITs expected to be operational soon. With no respite in inflation, the Reserve Bank was left with no option but to increase the key rates in order to have a tighter grip over the economy.”

Mr.Abheek Barua, Chief Economist, HDFC Bank said, “The fact that the MPC has swiftly responded to the upside pressures on inflation should address fears that the committee structure was making decision making sluggish and the questions about the RBI’s independence. This we believe is a healthy development. The MPC unanimously decided to hike the policy rate by 25 bps today. The hike was in response to various upside risks (oil and core) that have unfolded since the last monetary policy meeting. As per the policy statement, while the MPC took into account the recent increase in oil prices and persistent core inflation (excluding food, fuel and HRA), two important drivers (of inflation) were left out – the expected hike in Minimum support prices and the impact of the recent rupee depreciation (which could have an inflationary impact across the board for imported items). Just to recall, as per the April monetary policy report, the RBI had assumed USD/INR level of 65.04. The MPC also revised up its inflation estimate for FY19 from 4.65% to 4.85% (H1: 4.8% to 4.9%, H2: 4.7%), however, we believe there could be further upside to these numbers. Taking into account the rise in oil prices, marginal depreciation in the rupee, and the expected increase in MSP for the upcoming Kharif season, we expect CPI inflation to average at around 5.1% in FY19. Despite hiking, the monetary policy stance was left unchanged as “neutral”. The MPC justified this by saying that they would be data dependent, keeping the window open for a prolonged hold going ahead. However, given the rising inflationary pressures and the possibility of an overshoot above the RBI’s projected path for inflation, we believe this is just the beginning of a rate hike cycle. There could be further monetary policy action warranted with at least one more 25 bps rate hike before the end of the year. Liquidity: Some of the pressures of a rate hike (today) are likely to get offset by enhanced use of SLR to meet LCR requirements. The RBI permitted banks to use government securities held by them upto 2% of their NDTL within the mandatory SLR requirement for their LCR requirements in addition to the current existing assets. Hence the total carve-out from SLR available to banks would be 13% of their NDTL. FX and Bonds: Today’s rate hike was largely priced in by the markets. However, there could still be some more upside to bond yields, on expectations that inflation could continue to surprise on the upside. Consequently, we also expect marginal appreciation in the rupee to come back. Although gains in the rupee could be limited ahead of the Fed policy meet (12-13 June) and rising geopolitical tensions in the euro zone (which could trigger a risk off scenario against emerging markets in general). We expect bond yields to climb up to 8.2% by the end of the fiscal and the rupee to depreciate by 3% in FY19 (One-month range: 67-67.5 against the dollar by June-end).