Impact of rising RBI rates: what stock and bond investors need to know

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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 the main repo rate by 50 basis points while Governor Shaktikanta Das remained bullish on domestic growth. He said the national economic recovery was broadening despite many uncertainties on the global front.

The Sensex was up over 250 points while Nifty hovered around 17,500 levels. Srikanth Subramanian, CEO-designate, Kotak Cherry, said that “stock markets had already priced in the upside and therefore did not hamper overall market sentiment. However, with several headwinds and not-so-cheap valuations of the Indian market , investors should remain cautious in the stock market and not react to every market move.”

The Nifty Bank Index rose 1% and is holding above 38,000 levels. Naveen Kulkarni, Chief Investment Officer, Axis Securities, said: “Repo rates have returned to pre-pandemic levels, the highest since August 2019. We have seen liquidity in the system tighten since RBI began to remove excess liquidity, and system credit growth improved to 14%. With credit growth accelerating, we believe banks with a higher share of floating rates and a strong CASA-led deposit franchise should be well positioned in this rising interest rate environment. While domestic inflationary pressures appear to be gradually easing, geopolitical tensions, global financial market volatility and the emerging risk of a global recession continue to remain key risks.”

Foreign exchange markets

The Indian Rupee rose today to 79.23 per US Dollar from the previous close of 79.47. “Overall, the policy was a bit more hawkish than expected. A further calibrated tightening of monetary policy should contain inflationary pressures. On the regulatory side, a key development has been to allow primary dealers to act as market makers in the foreign exchange markets. The move is aimed at broadening participation in the forex market,” the IFA Global Research Academy said.

RBI Governor Shaktikanta Das during the monetary policy announcement said the central bank remained vigilant and focused on keeping the Indian Rupee stable. “In the current fiscal year (through August 4), the US Dollar Index (DXY) has appreciated 8.0% against a basket of major currencies. Against this backdrop, the Indian rupee has moved in a relatively orderly fashion, depreciating 4.7% against the US dollar over the same period – faring much better than several reserve currencies as well as many of its EME peers. and Asians. The depreciation of the Indian rupee is more due to the appreciation of the US dollar than to the weak macroeconomic fundamentals of the Indian economy. The RBI’s interventions in the market have helped contain volatility and ensure an orderly movement of the rupiah,” he said.

Bond markets

Yields on Indian government bonds rose today after the central bank raised its policy rate by 50 basis points to tame high inflation. The RBI also kept its outlook for inflation and GDP growth stable. The 10-year bond yield was 7.2588%, down from 7.1073% earlier in the day. The MPC maintained its GDP growth projection for 2022/23 at 7.2%, while its inflation forecast remained unchanged at 6.7%.

Analysts say that although the RBI did not raise the inflation forecast, the tone leaned towards the hawkish side.

“The MPC today unanimously decided to raise the repo rate by 50 basis points and maintain the policy stance of ‘withdrawal from accommodation’. The MPC took comfort in the broad domestic growth impulses, while keeping its FY23 GDP growth projection unchanged at 7.2% Despite the recent moderation in global commodity prices, MPC maintained its FY23 inflation projection 23 to 6.7%.Given the backdrop of global recession and accompanying disinflationary impact, we expect India’s policy rates to come in at just under 6% this calendar year. similarly, other rate actions will be more calibrated and data dependent. The benchmark 10-year government bond yield is expected to remain in the 7.10-7.40 band in the near term,” said Churchill Bhatt, executive vice president, Debt Investments, at the Kotak Mahindra life insurance company.

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