The Reserve Bank of India (RBI) kept the repo rate unchanged at 4%. However, there was a decisive hawkish shift as RBI turned its attention to rising inflation concerns and less on growth – which should underpin the rupee, economists at Commerzbank report.

Inflation risks front and centre

“Although it remained accommodative, RBI said it will focus on the ‘withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.’ It took an initial step by introducing the Standing Deposit Facility.”

“RBI raised the inflation forecast for the current fiscal year 2022-2023 to 5.7% from 4.5% previously in the February meeting. It expects inflation to peak in Q2 at 6.3% before moderating to 5.8% in Q3 and 5.4% in Q4. Growth for the current fiscal year was also revised down to 7.2% vs 7.8% previously.” 

“Given the hawkish tilt, we could see up to 50bp hike in the second half of the year, beginning possibly in August. This could provide some support for INR or at least restrain the upside in USD/INR.”