The Reserve Bank of India on Wednesday raised interest rates for the second straight meeting, but retained its "neutral" stance as it aimed to contain inflation while not choking growth.
The RBI's monetary policy committee raised the repo rate by 25 basis points to 6.50 percent, in line with predictions by 37 of 63 economists in a Reuters poll last week.
Five of the six members on the rate panel voted for a rate increase.
The reverse repo rate was also raised by 25 basis points, to 6.25 percent.
Anagha Deodhar, Economist, ICICI Securities, Mumbai:
"The hike was expected, but what is surprising is the stance has remained "neutral". We were expecting that since this is the second consecutive hike in two policies, the stance would be changed to "tightening".
They have not quantified the impact of MSP (minimum support prices) on inflation, or when MSP will start affecting inflation - whether it will be in October or earlier than that. I would have liked to see some clarity on that.
We are expecting at least one more hike this financial year.
I don't think rupee will be a key factor in the Reserve Bank of India's rate decision because they have repeatedly said they do not target any specific value of rupee - they just want to curb volatility.
The high-frequency indicators show that growth has been pretty good - we expect Q1 growth to be between 7.6 percent and 7.7 percent. With the implementation of MSP hike, I expect H2 inflation will be higher than the initial forecast."
Shashank Mendiratta, India Economist, ANZ Bank, Bangalore
"The tone of policy seems slightly on the hawkish side despite RBI tinkering only marginally with its second-half inflation projection. The RBI continues to reiterate long-standing risks to inflation and in particular oil prices remain a key risk.
HRA revision by the state government is another item on the RBI's radar. Another factor is MSP. A part of the MSP increase has already been incorporated by the RBI in June inflation projection, and the marginal increase in inflation projection this time is due to higher than historical revision in MSP.
The rupee will remain under pressure due to worsening domestic fundamentals and capital outflows.
The case for another hike is not off the table, there could be one in October."
Ajay Srivastava, CEO, Dimensions Corporate Finance Services
Q. This rate hike is not much of a bad news at all for the stock markets but we have seen a very muted reaction. Is it just that the market is digesting three days of gains, do you think it still looks poised after this rate to put the uncertainty beyond you and charge on?
A: It puts an end to uncertainty, we were expecting it and if it had not come then there would have been a problem. It has come and it has gone. What is also with the market is that in terms of you were mentioning liquidity very clearly we are seeing now the signals of the market are that on the demand side credit is slowing down.
There is surplus money in the system, not enough want to take it. If you look at big ticket numbers coming out whether it is a Maruti sale, whether it is two-wheeler sales, whether its consumer durables they all are showing falling numbers or static numbers, which means to say that the consumer credit demand will also be muted as we go into the next quarter, which is a surprise because I presume we always plan to be on higher side of growth, which is all we are expecting.
But I think what is happening in the system is that you are seeing the numbers going down, credit demand is down. So there is enough liquidity and it is going into the bonds and therefore the bonds prices are not reacting.
So, I think it’s a function that you are seeing a very clear reflection that slowing demand and surplus liquidity and in RBI I think in all the measures are toning for a sense agreeing to demonetisation because they have handled NPA head-on, they are handling interest rate hikes head-on, no populism around it. I think one good confidence that we have an independent RBI doing good policy making. The other side there is not enough demand of credits, so you will not see spiking of interest in this scenario.
Q: What would you do with corporate bank stocks now, this was a tremendous week, we had a slew of earnings, the hope trade on corporate banks and now the policy is out of the way?
A: You have got to hold on to that, nothing more, you cannot add on. We just had a big equity event of HDFC Bank, so there is big issue in the market.
The HDFC Bank equity now is going to be a little more stable, will not show growth. But as I said, I think we are looking at a scenario where bank credit- if you look at the numbers already of Kotak, HDFC they were not very good numbers for the quarter and I think it is going to get worse because not enough cars, not enough motorcycles have been sold.
You can reasonable expect that not enough retail credit will come into the market and therefor banks will fight for market share.
So, if you look at the policy in context of what has happened to demand, the credit policy is protecting the foreign exchange side as well on the demand side but it is ignoring the big aspects that the demand is slowing in the system and a rate hike is never good for demand scenario and I guess that is what is worrying the banks today a little bit.
(With input from agencies)