The Impact of RBI Price Rise: What Stock and Bond Investors Should Know

Indian stock markets rose, the rupee strengthened and bond yields rose after the Reserve Bank of India raised its repo rate to pre-Covid levels. The Reserve Bank of India (RBI) raised its key repo rate by 50 basis points while Governor Shaktikanta Das remained bullish on domestic growth. He said that the domestic economic recovery has become broader in scope despite many uncertainties globally.

The Sensex is up more than 250 points while the Nifty has hovered near 17,500 levels. Srikanth Subramanian, Chief Executive Officer Designated, Kotak Cherry said, “The stock markets have already pared the rally and thus the overall market sentiment has not hampered. But with many headwinds and no cheap valuations of the Indian market, investors should remain cautious in the stock market and not react to all movement in the market.

Nifty Bank rose 1% and settled above the 38,000 level. “Repo rates are back to pre-pandemic levels, the highest since August 2019. We have seen a tightening of liquidity in the system since it began,” said Navin Kulkarni, chief investment officer at Axis Securities. Reserve Bank of India withdrawing excess liquidity and credit system growth improved to 14%.With the search for credit growth, we believe that banks with higher share of floating rates and strong deposit privilege led by CASA should be well positioned in this rising interest rate environment. While domestic inflationary pressures appear to be gradually receding, geopolitical tensions, volatility in global financial markets and emerging risks of a global recession remain major risks.”

Currency markets

Today the Indian rupee rose to 79.23 against the US dollar compared to the previous close of 79.47. Overall, the policy was a little tighter than expected. Standardized monetary tightening is likely to contain inflationary pressures. On the regulatory front, one of the major developments has been to allow core traders to act as market makers in the forex markets. This move aims to broaden participation in the forex market.”

Reserve Bank of India Governor Shaktikanta Das said while announcing the monetary policy that the central bank remains vigil and focused on maintaining the stability of the Indian rupee. “During the current fiscal year (until August 4), the US Dollar Index (DXY) has risen by 8.0 percent against a basket of major currencies. In this environment, the Indian rupee has moved in a relatively orderly manner as it depreciated by 4.7 percent against the US dollar during the same period. Period – which is much better than many reserve currencies as well as many currencies in emerging markets and Asian countries.The depreciation of the Indian rupee is more due to the appreciation of the US dollar rather than weak macroeconomic fundamentals of the Indian economy.Market interventions by the Reserve Bank of India have helped in containing fluctuations and ensuring orderly movement of the rupee.”

Bond Markets

India’s government bond yields rose today after the central bank raised its key interest rate by 50 basis points to tame high inflation. The Reserve Bank of India also maintained stable inflation and GDP growth expectations. The 10-year note yield was at 7.2588%, up from 7.1073% earlier today. The MPC kept its 2022/23 GDP growth forecast at 7.2%, while inflation expectations remained unchanged at 6.7%.

Analysts say that although the Reserve Bank of India did not raise inflation expectations, the tone was tilted towards the optimistic side.

“The Monetary Policy Committee today unanimously decided to raise the repo rate by 50 basis points and continue with the policy stance of “removing the easing.” The MPC felt comfortable with the broad base of domestic growth drivers, while maintaining the GDP growth forecast for FY23 Unchanged at 7.2% despite the recent moderation in global commodity prices, the MPC kept its inflation forecast for fiscal year 23 at 6.7%.Given the backdrop of global recession and its impact on lowering inflation, we believe that policy rates in India will peak below 6 % in this calendar year. In light of this, additional rate actions will be more calibrated and data-driven. The yield on benchmark 10-year government bonds is expected to remain in the 7.10-7.40 range in the near term,” said Churchill Bhatt, Executive Vice President, Debt Investments, in Kotak Mahindra Life Insurance.

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