India Monetary Policy September 2022

India: Reserve Bank of India hikes rates again in September

On 30 September, the Reserve Bank of India (RBI) hiked the repo rate by 50 basis points to 5.90%. Consequently, it also hiked its standing deposit facility rate and marginal standing facility rate by 50 basis points each, to 5.65% and 6.15% respectively. Five board members voted for the hike, with one voting for a 35 basis points increase.

The Bank said that the hike was needed to preempt second-round effects—where higher prices lead to higher wages, sparking a vicious cycle—and ensure that inflation converges to the Banks 2.0–6.0% target in the medium-run. The Bank pointed out upside risks to the inflation outlook, including a weaker rupee versus the dollar, food prices, geopolitical tensions and supply disruptions. The Bank expects inflation to remain above target until January–March 2023. The recent weakening of the rupee also prompted the Bank to state it was prepared to intervene in the FX market should it prove necessary. Meanwhile, the Bank highlighted a more healthy economic outlook as providing room for the hike: It expects a boost to agricultural activity from recent rainfall and a rebound in services as the economy reopens from Covid-19.

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—such as due to a swing in commodity prices—could prompt the Bank 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 5–7 December.

Analysts at Nomura commented on the outlook:

“We continue to think the RBI will be guided primarily by local considerations, but our house view of a higher US terminal fed funds rate (5.25-5.50% by March 2023) and a weak currency (USD/INR at 85 by November) does add some upside risks to our forecast. Therefore, we are raising our terminal repo rate forecast to 6.50% (from 6.15% earlier), with a 35bp hike in December and a final 25bp hike in February.”

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