Mixed reaction to RBI’s decision to hike rates

The central bank’s second unscheduled interest rate rise was broadly expected, however, Indian economist and market pundits feel that the RBI’s governor Yaga Venugopal Reddy did not keep his word of taking a “determined and calibrated”action against inflation.

The general mood in Mumbai is that a 50 bp increase was exaggerated, as economist fear that it will hurt the country’s growth rate.

D.K. Joshi, principal economist at rating agency Crisil, told Reuters the move aimed to control second-round effects of the recent fuel price rise and also other input cost increases such as steel.

“This move will bring down future demand and reduce the pressures on prices,” Joshi said.

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Abheek Barua, chief economist at HDFC Bank, said the step was extreme and the market had expected smaller increases in the policy rates. He saw the benchmark 10-year bond yield climbing from Tuesday’s close of 8.57 percent.

“The 10-year bond yield will move up to 8.8-8.9 percent and there is a possibility of a spike in yields in general across the curve,” Barua said.

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Nitin Jain, MD and CEO, ICICI Securities, said the rate hike came as a surprise. “The Governor’s statement of a calibrated move was interpreted as meaning a 25 bps hike rather than a 50 bps. But the market was trying to discount an 8.5% repo rate, whether in two moves or one move.”

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Dhawal Dalal, head of fixed income, DSP Merrill Lynch Mutual Fund, told the Times of India: “One can safely say that the bond market will react negatively in the opening hours of trade (on Wednesday) and the benchmark 10-year bond yield may touch 8.75% in the near term”