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RBI Monetary Policy Reaction – Entering the Red Zone

As anticipated, with inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI has decided to increase the repo rates by 50 bps. It is now increased to 4.90%. “A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales.” quoted Anuj Puri, Chairman – ANAROCK on RBI Monetary Policy.

Considering that inflation continues above its target zone of 6%, a hike was inevitable, and it will doubtlessly have some repercussions on housing uptake. The RBI is tasked with controlling the spiralling inflation in the country but must simultaneously be careful to not hurt demand recovery. This is a tightrope walk under the best of circumstances. Overall, high inflation with low GDP can be cause of worry but as of now the Indian economy remains robust.

The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12% and above.  Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments.

The silver lining is that the Indian housing market is still largely end-user driven, so there is no investor mindset seeking the lowest possible entry point. Genuine demand comes from an underlying aspiration for homeownership.

“The rate hike of 50 bps was in line with market expectations. With this hike, RBI is closer to bringing the repo rate back to the pre-covid levels of 5.15%. The RBI has clearly acknowledged the inflation risks primarily driven by food and commodity prices and revised its FY23 inflation projection upwards by 100 bps to 6.7% (from 5.7% in the April meeting). The 2% to 6% inflation band is now expected to be breached for three consecutive quarters. Given this context, RBI is expected to front-load its rate hike actions. However, the growth forecast for FY23 remains unchanged at 7.2%. Overall, the focus at the current juncture is clearly on controlling inflation and the government has also joined the RBI in an attempt to contain inflationary pressures in the economy. As bond yields have increased over the last few months (factoring in for a large part of future rate hikes), debt fund yields are becoming more attractive (especially in the 3-5Y duration segments).” quote on RBI Monetary Policy from Mr. Arun Kumar, Head of Research, FundsIndia. 

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