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India's Banking Dilemma: RBI to the Rescue? | SSEI

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It has been a volatile week for the Indian markets which kept the market participants on their toes amid weakness in the global markets followed by steep depreciation in the Indian rupee against the dollar. Domestic markets have been under pressure after the Federal Reserve increased the interest rate by 75 bps for the third straight time in the United States.

RBI Monetary Policy Meet headed by Governor Shaktikanta Das will be announcing their decision on the key interest rate tomorrow after a three-day meet that started on Wednesday. In the last meet, the MPC increased 50 basis points in repo rate in both June and August months after raising the short-term lending rate by 40 basis points in an off meeting sudden decision in May.

In the upcoming announcement, we expect RBI to increase the repo rate by at least 40-50 bps. The MPC majorly considers the consumer price index inflation to decide the interest rates. The government has directed RBI to ensure the retail inflation remains at 4%, with a margin of 2% on either side to be taken.

RBI also takes major cues from its international counterparts including the Federal Reserve and ECB which have already taken massive hikes in the recent past. Since, the month of May 2022, the Indian central bank has increased around 140 basis points in its effort to curtail the boiling inflation. Despite the above-mentioned sharp hikes, RBI inflation to remain above its comfort zone and has retained the CPI inflation forecast at 6.7% for the current fiscal year.

It is not a certainty that the RBI will definitely increase the repo rate in tomorrow’s announcement but the quantum of the increase will be the major key point to be tracked. Apart from this, the commentary of the governor will also be watched in which the inflation and growth figures have to be noted.

Below is the snapshot of, how the markets may react to the RBI’s MPC outcome:

RBI POLICY DECISION - BELOW 50 BPS HIKE

COMMENTARY - DOWISH

IMPACT ON MARKETS - POSITIVE

RBI POLICY DECISION - BELOW 50 BPS HIKE

COMMENTARY - HAWKISH

IMPACT ON MARKETS - NEUTRAL

RBI POLICY DECISION - 50 BPS HIKE

COMMENTARY - DOWISH

IMPACT ON MARKETS - POSITIVE

RBI POLICY DECISION - 50 BPS HIKE

COMMENTARY - HAWKISH

IMPACT ON MARKETS - NEGATIVE

RBI POLICY DECISION - 75 BPS HIKE

COMMENTARY - DOWISH

IMPACT ON MARKETS - NEGATIVE

RBI POLICY DECISION - 75 BPS HIKE

COMMENTARY - HAWKISH

IMPACT ON MARKETS - VERY NEGATIVE

RBI Governor’s Commentary will be very important in tomorrow’s session with regards to the inflation and growth in the coming couple of quarters and also the targets set by the central bank.

Short-term traders should hedge their trading positions for tomorrow while on the flip side investors should start accumulating quality stocks from current levels after the recent correction, if further corrections come then it will be a good opportunity to add more to the portfolio.