Rate hike signals RBI wants to act quickly before inflation derails growth, say experts

The RBI's surprise rate hike on Wednesday suggests that the central bank wants to act quickly before inflation derails the growth recovery, experts said.

In a move that will raise borrowing costs for corporations and individuals, the RBI after an unscheduled MPC meeting hiked the benchmark lending rate by 40 basis points (bps) to 4.40 per cent to contain inflation that has remained stubbornly above the target of 6 per cent for the last three months.

Also Read: RBI raises CRR by 50 bps to 4.5% from May 21

"We believe that the lending rates may go up gradually, and since there is enough liquidity in the system, our borrowing cost may go up only gradually. Most of the borrowing for us is fixed in nature and hence the rate hike will not have an immediate impact on borrowing cost," said Umesh Revankar, Vice Chairman and MD, Shriram Transport Finance.

According to V Swaminathan, Executive Chairman, Andromeda and Apnapaisa, the rate hike was on the cards as the policymakers were under immense pressure due to the rising inflation in the country and at the global level.

"All the loans that come under the Repo Linked Loan Rate (RLLR), especially the home loan and the Loan against Property will now cost higher and there can be a subsequent increase in other loans EMI as most of the banks have already started increasing the MCLR since the beginning of this fiscal year," he said.

Abhishek Goenka, founder of IFA Global, said the RBI did feel the heat lately and took the markets by surprise by hiking rates across repo and cash reserve ratio (CRR).

"We have lately seen large FMCG companies feeling the heat across their bottom-line which is clearly reflected in their prices and communication. The market was expecting a rate hike by RBI but in a slower pace," he said.

It is for the first time since August 2018 that the key interest rate has been hiked by the Reserve Bank with an aim to check the rising inflation. The CRR too has been increased by 50 bps to suck out Rs 87,000 crore liquidity from the system.

"We expected a hike in June. The surprise move by the RBI to raise the policy rates a month earlier suggests that it does not want to wait and watch but act quickly before inflation derails the growth recovery," said Rumki Majumdar, Economist, Deloitte India.

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Pradeep Multani, President, PHD Chamber of Commerce and Industry, said though the RBI's step is aimed at addressing the inflationary pressure, hike in the repo rate and CRR will hurt the consumer and business sentiments.

"The economy is still recovering from the pandemic impact of coronavirus, yet there are worries from geo-political developments, such as likely contagious impact on trade and finance," he noted.

Sandeep Bagla, CEO, Trust Mutual Fund, said market participants should expect at least a 35 bps hike in June as well.

In spite of the hikes, the monetary policy still remains accommodative, he said, adding, "It is like saying that your salary has been increased, but you still remain underpaid. The implication is the rates need to be hiked far more than current levels."

Rohit Arora, CEO and Co-Founder, Biz2Credit and Biz2X, said the rate hike in US is going to pressurise the RBI to start increasing interest rates in India too, which will lead to debt getting more expensive and further downward pressure on Indian rupee.

"The elevated inflation levels will further worsen and GDP growth rate will see a further fall from an expected 7 per cent growth to around 5.5-6 per cent," he said.

Aditya Damani, founder of Credit Fair, said RBI had already given indications of monetary tightening last month.

Yet these actions were slightly surprising for the market since the meeting was unscheduled, he said.

Rajiv Shastri, Director and CEO, NJ AMC, said this rate hike is an attempt to control secondary inflation which can become sticky and persist even after commodity prices moderate.

It is a preventive measure and not a reactive one, he added.

George Alexander Muthoot, MD, Muthoot Finance, said there is adequate liquidity for productive requirements of the economy and as such borrowing cost in the system may go up at a gradual pace.

"We believe this is surely the beginning of the RBI rate hike cycle, although in a calibrated manner to respond to the evolving growth-inflation situation," he said.

Madhavi Arora, Lead Economist, Emkay Global Financial Services, said 2022-23 could see overall policy rates going up by 125-150 bps.

"The terminal rate may be a tad higher than 5.50 per cent, with the RBI now showing its intent to keep real rates neutral or above," she said.