RBI Policy: April would be appropriate time to hike reverse repo rate, say analysts; banks, real estate, auto stocks to benefit most

In a surprise move, the Reserve Bank of India on Thursday kept the key lending rate unchanged and maintained accommodative stance against expected hike in reverse repo rate and change of stance to neutral by economists and analysts. The monetary policy committee held the lending rate, or the repo rate, at 4%, while the reverse repo rate, or the key borrowing rate, was also kept unchanged at 3.35%. 

The markets welcomed the RBI MPC meeting outcome as the benchmarks Nifty, Sensex rallied after opening firm on Thursday. The broader Nifty50 reclaimed 17,600, while the 12-share banking index Bank Nifty too surged by over 1 per cent to trade above 39,000-mark again. Sensex gained more than 500 points as the 30-share index touched 59,000 in the afternoon trade.  

Meanwhile, as the RBI kept key lending rates unchanged, market analysts believe that April would be the right time to hike reverse repo rate.  

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April will provide appropriate window for action on the reverse repo

"The market expectations were divided on a Reverse Repo rate hike to commence policy normalization. However, the RBI smartly focused on managing the surplus liquidity via VRR (variable repo rate) and VRRR (variable reverse repo rate) auction without disrupting market yields further. We believe April will be the appropriate window for action on the reverse repo,” said Mihir Vora, Senior Director & Chief Investment Officer, Max Life Insurance. 

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, was of the view that the central bank should have started policy normalization with atleast a 20 bps hike in reverse repo without much of market impact.  

"However, today’s policy risks sharper adjustments if inflation risks materialise. Inflation risks, especially from fuel prices, remains a concern and can materialize relatively soon. Compared to RBI estimates, we estimate FY2023 GDP growth 30 bps higher at 8.1% and FY2023 CPI inflation 50 bps higher at 5%. We believe it would be opportune to increase reverse repo rate hike by 40 bps in the April policy,” Rakshit added. 

Cheer from the Market

There is a cheer from the market in all quarters right now, which is a big positive, but with all major global central banks turning neutral from dovish, market participants would closely monitor this move by the RBI to see if they are falling behind the curve, says Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor.  

Interest rate-sensitive sectors to benefit

Abhay Agarwal, Founder, and Fund Manager, Piper Serica, SEBI Registered Portfolio Management Service Provider, said  RBI is more focused on protecting the nascent recovery rather than on increasing rates. "This will fray a lot of nerves and will cool down the bond yields. The interest rate-sensitive stocks like banks, real estate, and autos will be the biggest beneficiaries," said Agarwal. 

The tone of the policy review appeared sanguine on domestic inflation and cautious on growth, with a view to not sacrificing the latter in a futile attempt to control imported inflation, says Aditi Nayar, Chief Economist, ICRA Limited.   

"We continue to expect the 10-year yield to cross 7.0% in April 2022, once the FY2023 borrowing programme kicks off. However, it is likely to climb more slowly thereafter, given the postponement in the likely timing of the first repo rate hike to August 2022 or later, from our earlier expectation of June 2022," said Aditi.  

"Positive on equities over next 2-3 years horizon" 

Jaideep Arora, CEO, Sharekhan by BNP Paribas, believes that with the RBI projection, there is a possible case for moderation in consensus estimates earnings growth estimates in consumer demand driven domestic cyclical sectors. "Notwithstanding the near-term challenges, we continue to retain positive view on equities over next 2-3 years horizon on the back of expectation of a multi-year upcycle in Indian economy," he added.  

"RBI will hike the Repo rate by 100 bps by March 2023"

We continue to maintain that the RBI will move its policy stance to neutral, says Arvind Chari – CIO , Quantum Advisors. "It will move the operational policy rate to the Repo rate. And it will hike the Repo rate by 100 bps by March 2023. Liquid funds remain a good way to play this interest rate tightening cycle," says Chari.   

"Given the steepness of the yield curve, there are opportunities at some segments of the government bond yield curve. If you have a time horizon of 3 years+, then a combination of liquid fund and say a dynamic bond may work well over locking in at current rates in fixed deposits, provided you gradually increase your allocation to dynamic/long term bond funds on every rise in market yields in the coming year," he adds.  

"Repo rate may not be increased in FY23" 

Madan Sabnavis, Chief Economist, Bank of Baroda, says the surprise element in the credit policy is the very dovish stance taken by the MPC which in a way supports the expected large government borrowing programme as well as the corporates that will be borrowing funds this year.  

The take on inflation is fairly aggressive for FY23 as the forecast of 4.5% assumes that the oil economy remains stable, which is probably the biggest risk today, underlines the BoB Chief Economist  

"The forecast for growth is slightly less sanguine than the government, which forms the basis for taking a rather conservative view on the durability of growth.  This all means that the indication is that as of now it looks like the repo rate will not be increased in FY23 unless the numbers turn really adverse," she added

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)