Is the RBI making a policy error? – Rabobank

“Today, the MPC decided to keep its policy rates on hold but changed its stance from neutral to calibrated tightening. This call certainly was a surprising one, as markets and economists were expecting a 25bps rate hike. Markets have reacted fiercely with the INR sliding further and the Nifty taking a beating,” argue Rabobank analysts.

Key quotes

“The MPC defended its choice by emphasising the inflation targeting mandate of the RBI. Against the backdrop of a worsening current account deficit, surging oil prices, weakening INR, a continuing tightening path of the Fed and markets suffering from high anxiety, we feel that this view of the RBI can be considered too narrow.”

“Moreover, we believe the RBI is underestimating the inflationary pressure in the Indian economy and the impact of ongoing Fed tightening, which will continue beyond this year.”

“Ultimately, we believe the RBI is making a policy error, which has implications for our INR forecast. We hold on to our view that the INR rate ultimately has too return to its fundamentals (of approximately 68), but the trajectory towards this rate will take much longer and will be more painful than we initially anticipated.”