Inflationary pressures and risks of global spillover mean the RBI keeps its guard up

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) continues to frontload rate hikes. The MPC raised the policy rate by 50 basis points (bps) in today’s meeting, bringing the repo rate to 5.9%. This is the third consecutive 50 bps hike in this cycle, taking the cumulative hike to 190 bps.

The rate hike can be seen as a response to both elevated domestic inflation and spillover risks arising from aggressive monetary tightening by major central banks.

The frontloading of the repo rate hike was expected, particularly in the light of a sharper rate hike path stated by the United States (US) Fed and continued rate hikes by other major central banks. Further, domestic inflation is still above the RBI’s upper tolerance limit and faces pressure from food and core inflation. Against this backdrop, we expect the MPC’s future actions to be determined largely by the trajectory of domestic inflation. Developments in the external sector and monetary policy actions of other central banks will also influence its decision on rates.