India Monetary Policy August 2022

India: Reserve Bank of India hikes rates again in August

On 5 August, the Reserve Bank of India (RBI) decided to increase the repo rate—its main policy instrument—by 50 basis points to 5.40%. Consequently, it also hiked its standing deposit facility rate and marginal standing facility rate by 50 basis points each, to 5.15% and 5.65% respectively. This hike was voted unanimously and went beyond expectations; most market analysts predicted a smaller hike.

The Bank’s decision was driven by the desire to control inflation, which is currently at 7.0%, above the 2–6% tolerance band. Protecting the domestic currency was likely also a factor for the RBI: Widespread inflation and interest rate hikes abroad have led to a marked appreciation of the U.S. dollar since early June. On the domestic front, the RBI stated that, according to high frequency indicators, industrial and service activities were healthy, which provided the leeway for the Bank to hike.

The Bank did not provide explicit forward guidance. However, the RBI expects inflation to remain above the tolerance band until January–March 2023 and believes that second-round effects—where higher prices push wages up, further increasing prices—are still a key upside risk to inflation. As such, the Consensus is for further rate hikes by the end of the current fiscal year (March 2023).

Analysts at Nomura commented on the outlook:

“We expect the pace of hikes to slow from hereon, unless global commodity prices and/or local inflation surprise significantly to the upside. We retain our view of a terminal policy rate of 6%, but we expect this to be reached earlier in December 2022 versus February 2023 earlier. We expect a 35bp hike at the next meeting in September and a final 25bp hike in December, before growth concerns and the cumulative rate hikes delivered thus far, lead the MPC to pause.”

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