Hikes By 50bps, As Inflation Fight Prioritized

The RBI hiked rates by 50bps. This takes the policy rate to 5.40%, which was above the market consensus of 5.25%. As we noted in our preview, today's call was a close decision between a 35bps or a 50bps hike. In the event the RBI has prioritized the inflation fight.

• RBI Governor Das stated that Q2 and Q3 inflation was seen above upper tolerance levels. Recall, the June CPI YoY print came in at 7% YoY, while the RBI maintains a 2-6% target.
• In terms of the growth and inflation outlook, Das stated the risks were evenly balanced.
• The growth projection for the current financial year of 7.2% was retained. The domestic recovery was seen as broadening, but risks were posed by the external sector.
• On inflation, the current projection of 6.7% was retained for this financial year. Household inflation expectations had moderated but remained at a high level, while there signs of easing supply chain pressures and global commodity prices are off highs.
• In terms of market reaction USD/INR moved below 79.00 post the announcement but we have stabilized back above this level now. Onshore bond yields have climbed, the 10yr rebounding to 7.25%, +10bps for the session. Local equities are off earlier highs.
• With the policy rate now above 2019 highs, our sense is that the pace of rate hikes is likely to slow going forward, although a lot depends on how inflation evolves. Next Friday July figures print, with the market expecting an easing in YoY momentum to 6.80%.