Indian stock markets rose, the rupee strengthened and bond yields rose after the Reserve Bank of India raised the repo rate to pre-Covid levels. The Reserve Bank of India (RBI) raised key interest rates by 50 basis points, while Gov. Shaktikanta Das remained optimistic on domestic growth. He said the domestic economic recovery is gaining broader footing despite many uncertainties on the global front.
The Sensex surged over 250 points while Nifty hovered near 17,500 levels. Srikanth Subramanian, CEO-elect of Kotak Cherry said: “Equities markets had already priced in the hike and therefore did not affect the overall market sentiment. However, given multiple headwinds and not-so-cheap valuations in the Indian market, investors should remain cautious in the stock market and not react to every market move.”
The Nifty Bank Index rose 1% to remain above 38,000. Naveen Kulkarni, Chief Investment Officer, Axis Securities said: “Repo rates have returned to pre-pandemic levels, the highest since August 2019. We have seen a tightening of system liquidity since the RBI began withdrawing excess liquidity , and system credit growth improved to 14%. With credit growth accelerating, we believe that banks with a higher share of floating rates and a robust CASA-led deposit business should be well positioned in this rising interest rate environment. While domestic inflationary pressures appear to be gradually easing, geopolitical tensions, volatility in global financial markets and the looming risk of a global recession remain key risks.”
Forex Markets
The Indian rupee rose to 79.23 per the US dollar today, compared to the previous close of 79.47. “Overall, the policy was a bit more restrictive than expected. Further calibrated monetary tightening should contain inflationary pressures. On the regulatory front, a key development has been to allow primary dealers to act as market makers in the FX markets. The move is intended to expand participation in the foreign exchange market,” said IFA Global Research Academy.
RBI Governor Shaktikanta Das, in announcing monetary policy, said the central bank remains vigilant and focused on maintaining stability in the Indian rupee. “For the year-to-date (ended August 4), the US Dollar Index (DXY) is up 8.0 percent against a basket of major currencies. In this environment, the Indian rupee has moved relatively orderly, depreciating 4.7 percent against the US dollar over the same period – significantly outperforming several reserve currencies and many of their EME and Asian counterparts. The depreciation of the Indian rupee is due to the appreciation of the US dollar rather than weakness in the Indian economy’s macroeconomic fundamentals. Market interventions by the RBI have helped contain volatility and ensure an orderly movement of the rupee,” he said.
bond markets
Indian government bond yields rose today after the central bank hiked interest rates by 50 basis points to curb high inflation. The RBI also kept its inflation and GDP growth outlook unchanged. The 10-year bond yield was 7.2588%, up from 7.1073% earlier in the day. The MPC kept its GDP growth forecast for 2022/23 at 7.2%, while its inflation forecast remained unchanged at 6.7%.
Analysts say although the RBI did not raise inflation forecasts, the tone tilted towards the dovish side.
“MPC today unanimously decided to increase the policy repo rate by 50 basis points and maintain the policy stance of ‘withdrawal of adjustments’.” Despite the recent slowdown in global commodity prices, MPC has maintained its FY23 inflation forecast at 6.7%. Given the backdrop of the global recession and associated disinflationary fallout, we believe interest rates in India will peak just below 6% this calendar year. Against this backdrop, further rate action will be more calibrated and data dependent. Benchmark 10-year Treasury yields are expected to remain in the 7.10 to 7.40 range in the near term,” said Churchil Bhatt, executive vice president, debt investments, at Kotak Mahindra life insurance company.
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