India: Further RBI tightening on the cards – UOB

Head of Research at UOB Group Suan Teck Kin, CFA, assesses the latest RBI monetary policy decision.

Key Takeaways

“The Reserve Bank of India (RBI) lifted its benchmark repo rate by 50 bps to 5.40% from 4.90% in its Aug monetary policy meeting in a unanimous decision. The move was more aggressive than Bloomberg survey of a 25bps hike but matched our expectation. The Monetary Policy Committee (MPC) will remain focused on the withdrawal of accommodation to ensure that inflation stays within the target going forward, while supporting growth.”

“The MPC noted that despite a challenging global environment, domestic economic activity is showing signs of broader recovery, while inflationary pressures appear to be in an inflection point with ‘incipient signs of a confluence of factors’ that could lead to further softening of domestic inflationary pressures. Inflation is expected to remain above the upper tolerance band of 6% in 2Q and 3Q. With the crude oil price assumed at an average of US$105/bbl and a normal monsoon, RBI kept its inflation rate projection at 6.7% in 2022-23 (which was last raised from previous forecast of 5.7% at the Jun MPC).”

“RBI remains sanguine on its growth outlook, with both consumer and business sentiment improving and the rebound in contact-intensive services is expected to sustain urban consumption. GDP growth forecast for 2022-23 is kept at 7.2% (after having downgraded it from 7.8% in Apr), with ‘risks broadly balanced’. RBI noted headwinds from global forces - protracted geopolitical tensions, rising global financial market volatility, tightening global financial conditions; and global recession risks.”

“With the policy priority on containing inflationary pressures from second-round effects of supply side shocks and anchoring long term inflation expectations, there is still room for the RBI in its rate hike trajectory. After kicking off with the surprise unscheduled 40bps move on 4 May and the 50bps hikes in Jun and Aug, we think that the RBI will add on another 50bps rate increases in the two remaining MPCs in 2022 to bring the repo rate to 5.90% by the end of the year.”