India Monetary Policy May 2022

India: Reserve Bank of India hikes rates again in June meeting

On 8 June, the Reserve Bank of India (RBI) hiked the repo rate—its main policy instrument—by 50 basis points to 4.90%. It also hiked its standing deposit facility rate and marginal standing facility rate by 50 basis points each, to 4.65% and 4.15% respectively. The decision was driven by the Bank’s desire to keep medium-term inflation within the 2.0–6.0% target range.

The Central Bank raised its inflation forecasts this month, with inflation expected to remain above the target range until January–March 2023, instead of October–December 2022 as previously forecast. As a result, the Bank felt the need to raise rates to avoid inflation expectations becoming deanchored and to ensure that inflation converges to the target range in the medium-run. A strong ongoing economic recovery gave the RBI the leeway to hike without fear of slowing activity significantly.

In its communiqué, the RBI retained its hawkish tone, stating that it would remain focused on the “withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. It again mentioned the upside risk to inflation posed by second-round effects—where higher prices push wages up, further increasing prices—thus highlighting the urgency of raising rates to reign in medium-run inflation and inflation expectations. Indeed, all our panelists see further rate hikes by the end of FY 2022, with a minimum of 10 and a maximum of 135 basis points of additional tightening forecast.

The next meeting is scheduled for 2–4 August.

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