RBI rate hikes of 50 bps expected in next two policies, terminal repo rate to reach 6.0%: Kotak report
New Delhi, October 10
The Reserve Bank of India is expected to deliver an additional 50 basis points of interest rate increases across its next two policy meetings, pushing the terminal repo rate to 6.0 per cent, according to a research report by Kotak Institutional Equities.
The projection follows the central bank's decision to lift the repo rate by 25 basis points to 5.5 per cent on Wednesday, alongside a shift in monetary stance from neutral to calibrated tightening. The report noted that the move reflects rising inflationary pressures and points to further rate hikes ahead, even as the tightening cycle remains relatively shallow.
"The move was driven by a firmer macro outlook and higher inflation forecast. It strengthens the case for additional rate hikes despite the likelihood of a relatively shallow tightening cycle," the report stated.
"Our base case remains for a further 50 bps of hikes over the next two policy meetings, taking the terminal repo rate to 6.0%, although persistent food and energy shocks could extend the hiking cycle beyond our current expectations," the brokerage added.
Addressing credit health concerns that typically accompany rising borrowing costs, the research report pointed out that the financial sector enters this upward phase with strong fundamentals. While higher rates often prompt caution regarding asset quality and growth, the current environment presents limited risk due to clean balance sheets and stricter underwriting rules implemented after regulatory scrutiny of unsecured lending during FY2023-24.
"Historically, rate-tightening episodes driven by global inflation and liquidity dynamics have had a smaller bearing on credit costs than cycles preceded by prolonged domestic credit excesses," the report stated.
"The sector enters this phase with healthy balance sheets, having already tightened underwriting standards following regulatory concerns around unsecured lending during FY2023-24. We see limited evidence of any build-up in credit risk and believe most portfolios are well positioned to absorb higher rates," it noted.
The report also mentioned that recent credit demand has been driven largely by corporate borrowers, whose balance sheets appear far sturdier than in past rate cycles. A moderation in loan growth is likely, but Kotak Institutional Equities attributes this primarily to a normalization of short-term financing needs that had surged following the Middle East crisis, rather than rate pressure alone.
Regarding profitability, the brokerage finds large private lenders best positioned to gain from the upward rate movement through net interest margin expansion.
"The structural shift in balance sheets, with increasingly pro-cyclical loan yields supported by fixed-rate deposits, should drive NIM expansion for banks, especially the large private banks, even if the expected rate cycle is relatively shallow," the report said.
— ANI
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