Lata Pillai, Senior Managing Director and Head – Capital Markets, India, JLL
RBI bites the repo rate increase bullet as inflation print and rising crude prices amid sustained geopolitical events are now posing a challenge to growth estimates
The RBI has raised the repo rate by 25 bps to 5.50%, ending a run of four successive holds while changing its stance to that of calibrated tightening. A hawkish global backdrop, an El Niño-hit monsoon and elevated inflationary pressures and rising energy costs left no head room to wait further, even as Q1 growth provides the confidence for this move.
The RBI raised the repo rate by 25 basis points to 5.50%, with the stance turning to calibrated tightening. This marks the first increase since February 2023 and follows four consecutive holds at 5.25%. The stance of further movements being likely towards pause and/or hike rather than a cut in repo, is indicative of the change in the sentiment. Rising inflationary pressures as CPI inflation rose to 4.82% in August, well above the threshold and an accelerating food inflation for the seventh straight month were likely factors that impacted the rate hike decision. The move is a pre-emptive measure to account for further inflation peaks later in the year, projected at 5.2% for CPI inflation for the current year and 5.7% for the next.
The strength of the economy, in fact has provided the RBI room to act, with real GDP for Q1 FY27 coming in strong at 7.8%, ahead of the RBI’s projection and up from 6.9% a year earlier. Other activity indicators were also robust with manufacturing PMI and services PMI remaining expansion-based, though slower q-o-q. This will likely help offset part of the drag from the hike with the economy on a stronger footing and thus better placed to absorb dearer credit impact. The RBI’s projected FY27 real GDP growth now stands at 7.1%, higher by 40 bps compared to the previous meeting. This underscores the resilience in domestic economy.
While the growth provides the cushion, rising energy and commodity costs and a sub-average monsoon are potential headwinds for forecasts.
A sub-average monsoon on account of El Nino is likely to impact food prices and is a vital reason for the RBI to maintain a vigilant stance on inflation even after this hike.
The current rate hike also comes in the wake of global tightening with rate hikes seen from ECB, BoJ and the Fed. The weakening rupee with foreign portfolio money flowing out from Indian equities has also forced the RBI’s hand along with the rise in crude prices, with the current hike seen as a defence against rupee depreciation and imported-inflation pressure, even as the FCNR-B deposits success has been a positive sign to support inflows.
For real estate, the rate certainty of the past year is likely coming to an end. We do expect that floating home rates will be repriced and higher construction costs will be passed onto the buyers, with mid-segment affordability likely to remain under the scanner. Demand fundamentals remain strong and a robust GDP growth, growing investments and a healthy construction sector likely to absorb the negative impact. The pace and extent of any further rate hikes are likely to matter more to the overall market than a single 25 bps hike.
Overall, this is a measured move in tandem with global movements and will be felt in EMIs and construction costs, but the overall direction and extent of the tightening will be more relevant for the sector.