RBI rate hike is more positive than negative for markets
The 25bps rate hike by the RBI lowers uncertainty for markets on the timing of the hike. Bond yields are largely factoring in multiple rate hikes and the 25bps rate hike has not moved markets by much.
Core inflation excluding HRA impact at 5.3% in April has prompted RBI to revise inflation estimates for FY 19 to 4.8% to 4.9% in H1 and 4.7% in H2, excluding HRA impact inflation is forecast at 4.6% in H1 and 4.7% in H2.
RBI is positive on growth outlook for the economy given positive trends in economic indicators such as industrial production, core industries growth, vehicle sales and consumption. RBI is also seeing the out put gap closing fast and a revival in investment demand.
On the markets front, RBI has carved for banks 2% of SLR for LCR purposes and also has allowed banks to spread MTM looses to spread over 4 quarters from 30th June 2018. SDLs are also now marked to market on banks books from earlier 25bps spread over Gsec, which will improve demand for government bonds but can make SDLs volatile.
Global growth outlook is firm, Fed will continue to hike rates while ECB could keep policy accommodative for longer periods of time.
Given RBI policy, domestic macros and global factors, markets will largely stay steady and move on expectations of earnings, monsoons and growth.