RBI Hikes By 50bps, With More To Come

As expected, the RBI hiked the repo rate by 50bps to 4.90%. Further tightening is very likely as the RBI raised its inflation forecast to 6.7% from 5.7% previously for the current financial year (ending March 2023).

• The commentary from Governor Das suggests more work needs to be done in bringing inflation back under the upper of the target band (i.e. sub 6%).
• Governor Das stated the RBI is likely to miss its inflation mandate, which states price pressures are not allowed to be more than 6% for 3 consecutive quarters. This will require the RBI to write a letter to the government explaining why this occurred.
• The RBI also dropped mention of policy staying accommodative and that the policy rate was still below pre-pandemic levels. Hence for tightening is coming. Note that 5.15% was the policy rate that prevailed at the start of 2020.
• Indian asset markets haven't reacted a great deal. Bond yields initially moved higher, with the 10yr spiking towards 7.56%, but we are now back to 7.48, around 3bps lower on the day. The RBI refrained from raising the cash reserve ratio, which is seen as supportive of liquidity and therefore bonds. Still, we are just shy of multi year highs for the 10yr year yield.
• Indian equities were weaker but have pared losses.
• USD/INR drifted a little lower, but edged back up to 77.70 to be unchanged on the day.