India Monetary Policy December 2022

India: Reserve Bank of India hikes rates again in December

On 7 December, the Reserve Bank of India (RBI) hiked the repo rate by 35 basis points to 6.25%. Consequently, it also hiked its standing deposit facility rate and marginal standing facility rate by 35 basis points each, to 6.00% and 6.50%, respectively. Five board members voted for the hike, with one voting against.

In justifying the move, the RBI noted that headline inflation remained above the 2.0–6.0% target and that core inflation remained persistently high. The RBI said it expected inflation to remain above target until January–March 2023, prodding it to hike rates in order to preempt second-round effects and anchor inflation expectations. Meanwhile, a robust economic outlook—India is expected to post one of Asias fastest growth rates in 2023—gave the RBI the leeway to hike.

The Bank did not provide explicit forward guidance. However, it stated it would continue to “remain focused on the withdrawal of accommodation” to ensure inflation returns to target “going forward”, and as a result, further hikes are likely ahead. The Bank asserted that risks to the inflation outlook appeared balanced; however, unexpected spikes or drops in inflation—due to a swing in commodity prices, for example—could prompt it to change course. A sharper-than-expected economic slowdown or rebound could also affect the speed of policy tightening.

The next monetary policy meeting is scheduled to take place on 6–8 February.

Analysts at Nomura commented on the outlook:

“We expect global spillovers in India to be more significant, and our FY24 GDP growth forecast of 5.1% y-o-y diverges from the RBIs estimate of ~6.5%. We expect a final rate hike of 25bp in February to 6.50%, followed by a policy pause. As growth disappoints, we believe rate cuts will commence. We are penciling in 75bp of rate cuts cumulatively in H2 2023 (25bp each in August, October and December), taking the policy rate to 5.75% by end-2023.”

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