Repo and reverse repo rates remain unchanged at 4% and 3.35%, respectively, RBI Governor Shaktikanta Das said.
The repo rate is the rate at which the central bank lends to commercial banks and the reverse repo rate is the rate at which the RBI borrows money from banks in the short term to suck excess liquidity into the system.
Analysts expected the RBI to raise the reverse repo rate by around 15 to 40 basis points. But instead, RBI decided to “maintain the accommodative stance for as long as necessary to revive and support growth on a sustainable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that that inflation remains within target going forward.”
The MPC voted unanimously to maintain the status quo on the repo rate and by a majority of 5 to 1. The last time the Reserve Bank of India cut the repo rate was in March 2020 by a total of 115 basis points (bps) to soften the blow of the pandemic and strict containment measures. The rate is now 250 basis points below its level at the start of 2019, at the start of the easing cycle.
“Unlike many central banks, the RBI is acting dovish and has kept interest rates unchanged with a dovish stance. It was expected that the RBI may increase the reverse repo rate and may change its neutral to dovish stance in tandem with hawkish global central banks amid rising inflation but RBI has maintained its current stance RBI believes inflation will peak soon and continued support is needed economy,” said Parth Nyati, founder of Tradingo.
So why didn’t the RBI raise rates as some economists expected?
The global economy is about:
The RBI believes that the rapid spread of the highly transmissible variant of Omicron since December 2021 and 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 as trade continues to grow, challenges persist due to container and labor shortages as well as high freight rates.
In its January 2022 World Economic Outlook update, the International Monetary Fund (IMF) revised down projections for world output and trade growth for 2022 to 4.4% and 6.0 % compared to its earlier forecasts of 4.9% and 6.7%, respectively. .
“In a global environment made highly volatile and uncertain by divergent monetary policies, geopolitical tensions, high crude oil prices and persistent supply bottlenecks, emerging economies are vulnerable to destabilizing global spillovers on a Thus, policymakers face daunting challenges even as the recovery from the pandemic remains incomplete,” Das noted.
Financial markets are volatile:
Commodity prices are rising again, which has increased inflationary pressures. Now that several central banks around the world are focusing on policy normalization, including an end to asset purchases and earlier than expected key rate hikes, markets have become volatile.
“Sovereign bond yields firmed across all maturities and equity markets entered correction territory. Rise in US rates. The latter also led to an upward and volatile movement in the US bond yield,” the RBI noted.
The knot: “The global macroeconomic environment is characterized by a deceleration in global demand in 2022, with growing headwinds related to financial market volatility driven by monetary policy normalization in Systemic Advanced Economies (EAs) and inflationary pressures resulting from the continued supply chain disruptions. Accordingly, the MPC judges that the ongoing domestic recovery is still incomplete and requires continued policy support,” the RBI said.
The domestic economy concerns: The RBI is still unsure of a broad-based recovery as private consumption and contact-intensive services are currently still below pre-pandemic levels.
Low demand: Due to the rapid spread of the Omicron variant, demand weakened in January 2022, even in rural India. For example, sales of two-wheelers and tractors contracted in December-January while among indicators of urban demand, sales of durable consumer goods and passenger vehicles contracted in November-December due to supply constraints while domestic air traffic weakened in January under the impact of Omicron.
PMI contracted on a monthly basis: Even though the manufacturing PMI remained in the expansion zone in January at 54.0, it contracted on a monthly basis compared to 55.5 in December 2021. Oil consumption recorded moderate growth and the port traffic has decreased. While finished steel consumption contracted in January, cement production increased by double digits in December. Services PMI rose on a yearly basis to 51.5 in January 2022, although the pace weakened from 55.5 in December.
Inflation is on the rise but will moderate soon: Consumer price inflation edged up to 5.6% year-on-year in December from 4.9% in November. Although the food group recorded a significant price decline in December, mainly due to vegetables, meat and fish, edible oils and fruits, the strong negative base effects in vegetable prices led to an increase in year-on-year inflation. Fuel inflation eased in December but remained in double digits. Core inflation or CPI inflation excluding food and fuel remained elevated, although there was some moderation from 6.2% in November to 6.0% in December, driven by transport and communications, health, housing and recreation and entertainment.
The RBI expects inflation to moderate in the first half of 2022-2023, proving that it is possible to remain accommodative.
“Timely and relevant government action on the supply side has been instrumental in containing inflationary pressures. Potential rising input costs are a contingent risk, particularly if international crude oil prices remain high. the domestic recovery is catching up with pre-pandemic trends, but private consumption is still lagging. COVID-19 continues to bring some uncertainty to the future outlook,” the RBI said.
Homebuyers can rejoice as home loan rates will stay low
Absent specific demand-side interventions in the 2022-23 budget, potential buyers may continue to benefit from lower home loan interest rates, which are here to stay for now. “With this decision, consumers and home buyers will continue to benefit from the decade low interest rates that have prevailed for the past few months,” said Dhaval Ajmera, Director, Ajmera Realty & Infra India.
“The housing market has shown a healthy rebound from the Covid crisis and low interest rates will help improve affordability and maintain growth momentum. The continued recovery of the housing market will have a strong multiplier effect on overall economic growth,” said Shishir Baijal. , Chief Executive Officer, Knight Frank India.
New borrowers can take out loans at competitive rates.
The repo rate has been on pause for almost two years now, which has created a window of opportunity for homeowners to accelerate their deleveraging.
“We thought 2020 rates couldn’t come down, but they continued to come down through 2021, reaching as high as 6.40-6.50 in several cases. New borrowers can take out loans at competitive rates Ongoing loans can be prepaid at low cost. Those with stable incomes should continue to prepay consistently either through lump sums or EMI increases. This will speed up their loan repayments and prepare them well for increases. rates, whenever it happens in the future.There is also a set of preferred borrowers – women, government employees, armed forces personnel, wage earners, those with credit ratings above 750 – who can exploit this situation and get the lowest rates,” says Adhil Shetty, CEO of BankBazaar.com
What does this mean for the markets?
Bond markets are recovering
Due to the dovish stance, bond yields have fallen and bond markets are recovering, leading to a rally in market earnings for banks and banking and housing finance companies. “There is market cheer in all quarters at the moment which is a big positive, but with all major global central banks moving from neutral to dovish, market participants would be watching this RBI move closely for see if they fall behind the curve,” said Sonam Srivastava, founder of Wright Research, a SEBI registered investment adviser.
The markets are reassured
It is quite reassuring for equities that RBI has maintained a dovish stance and kept the inflation estimate at its current level. In response, the BSE Sensex and NSE Nifty soared. Gains in financials, IT and metals stocks pushed the major indexes higher, although losses in auto, FMCG and pharmaceuticals stocks limited the upside.
“Interest rate sensitive stocks like banks, real estate and autos will be the biggest beneficiaries. Overall very positive in an environment of rising rates globally. With omicron concern as well behind us, we expect some kind of conical crisis will play out in the Indian stock market,” said Abhay Agarwal, Founder and Fund Manager, Piper Serica.
In a global environment made highly volatile and uncertain by diverging monetary policies, geopolitical tensions, high crude oil prices and persistent supply bottlenecks, emerging economies are vulnerable to destabilizing global spillovers on an ongoing basis. . Thus, policymakers face daunting challenges even as the recovery from the pandemic remains incomplete.
With contributions from Reuters