Markets cheer RBI’s 50 basis point hike; bank stocks rally as margins may improve

• Indian benchmark indices that opened in the green, gained further after RBI’s monetary policy announcement.
• RBI raised interest rates by 50 basis points to 5.4%, today.
• The markets have been pricing in a 35-50 basis point rate hike.
• Analysts say that more rate hikes are expected as inflation continues to be above the RBI tolerance level.

After opening in the green, Indian markets gained further after RBI governor Shaktikanta Das raised the benchmark interest rates by 50 basis points. This takes the repo rate to 5.4%.

This comes after a 90 basis point hike by the central bank in May and June this year to tackle rising inflation.

Sensex is up by 317 points at 58,615 while Nifty50 was up 82 points at 17,461.

The street has been pricing in a rate hike between 35-50 basis points.

"The monetary policy committee (MPC) decisions have been in line with our expectations. Given the increasing external sector imbalances and global uncertainties the need for frontloaded action was imperative. We continue to see a 5.75% repo rate by Dec 2022," said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

Most analysts have been pricing in a 35-50 basis point hike. “The headline inflation continues to be 7% plus, is way above the bank's upper end of the tolerance band,” Mohit Nigam, head - PMS at Hem Securities said.

The RBI has retained its FY23 GDP growth forecast at 7.2%.

Shares of banks rose after the rate hike with ICICI Bank being the top performer on the indices.

Bank stocks	% change today
IDFC First Bank	2.32%
ICICI Bank	1.90%
SBI	1.03%
Axis Bank	0.87%
Federal Bank	0.83%
Bank of Baroda	0.63%
PNB	0.60%

Following commentary by Das, economists and fixed income experts see more rate hikes coming in the near future as CPI forecasts are intact at 6.7% for the current financial year.

“This means we are not done with rate hiking cycle yet and we could brace for continued northward journey in rates,” Lakshmi Iyer, chief investment officer at Kotak Mahindra Asset Management Company.

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