RBI Starts Tightening Cycle As Inflation Surged Above Upper Band (6%)

• RBI governor Das surprised the market earlier today by announcing a 40bps hike in the repo rate during an online media briefing, lifting the benchmark rate to 4.4% after nearly two years of status quo.
• As a reminder, the RBI cut its policy rate by 115bps to 4% following the Covid19 shock and left interest rates unchanged to stimulate the economic recovery as CPI inflation had remained within the RBI range band (2% / 6%) until recently.
• However, the new inflation shock generated by the Ukraine war combined with the renewed global supply disruption amid strict lockdown policies imposed by the Chinese governments have led to a resurgence in inflation in recent months.
• CPI inflation surged back above the 6% level since the start of the year and is currently standing at its highest level since Q4 2020 (7%).
• Even though the move surprised investors as RBI hiked earlier than what market was expecting, it was only a question of time before Indian policymakers adopt a more hawkish stance to counter the inflationary pressures.
• INR saw initial strength in response to the rate decision, with USD/INR dropping to touch 76.1925, narrowing the gap with the support at the Apr21 low of 76.0925.
• The bottom chart (source: ING) shows that Food & Beverages sub-component has been responsible for most of the increase in the rise in inflation (raising from 1% to 3%).
• Overall, renewed inflationary pressures in Asia/SE Asia will push policymakers to adopt a more hawkish stance (ex- China) in the near to medium term to limit a significant surge in political uncertainty.

Source: Bloomberg/MNI/ING