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  • Hawks abound: What the RBI’s review minutes reveal about future hikes

    Publish date: 22nd June, 2018

    Earlier this month, the Reserve Bank of India (RBI) raised the repo rate, or short-term lending rate to banks, by 25 basis points to 6.25%. The hike came after four long years during which the country’s central bank had either reduced the rate or maintained the status quo.

    The minutes of the RBI’s monetary policy committee (MPC) meeting, released on Wednesday, reveals that all six committee members were unanimous on a rate hike for two compelling reasons:

          1.    The sharp rise in crude oil prices and its impact on the economy

          2.    Inflation expectations have become worrying

    Why the repo rate was hiked

    The RBI hiked the repo rate to tame inflation and rising inflationary expectations. In fact, retail inflation reached a four-month high in May as the Consumer Price Index (CPI) showed a reading of 4.87%. There are other reasons too. You can find the details here.

    Will the rate hike hurt?

    The repo rate hike came at a time when the economy was showing signs of a revival. The GDP growth was moving towards 8%. Private investment and credit growth were also picking up. However, since international crude oil prices have been climbing steadily and are beyond the government’s control, the inflationary estimates have grown.

    Bottom-line: The repo rate hike will make the cost of funds dearer for borrowers, including companies.

    How will the rate hike affect stock markets?

    Any rate hike by the central bank does not directly impact the stock markets. The rate hike has a ripple effect which may trickle down to the markets in the long run. The markets will watch closely if growth recovers sufficiently to compensate for the rising rates.

    If you look at the stock markets historically, you will notice that it reacts on the date the repo rate change is announced. However, this month’s hike in the repo rate is unlikely to have a significant bearing on the markets. The rate must fall below the threshold limit, which is around 6%, for the market to really react.

    More rate hikes in store?

    The RBI maintains a hawkish stance when inflationary expectations might be higher in the short to medium term. The RBI has hiked inflation projections to 4.8–4.9% for the first half of 2018–19 and to 4.7% for the second half of the fiscal.

    Related: What is a ‘dovish’ and ‘hawkish’ monetary policy

    The MPC minutes provide a clear indication of the central bank’s aggressive stance. The MPC members flagged concerns regarding minimum support price for farmers who were likely feeling the inflationary pinch.

    Market watchers expect the RBI to hike the repo rate by a full 50 basis points during 2018. Of this, the RBI has already hiked rates by 25 basis points. So, hopes are high that another rate hike of 25 basis points will arrive later this year.

    Also read

          1.    It’s a wrap: Market updates, news and insights for the week ending 22nd June

          2.    What Yoga teaches you about money and investing

          3.    Why we continue to have a ‘Buy’ rating on ICICI Bank