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“RBI hiked the benchmark rate by 25bp to 6.5% as expected for the second consecutive meeting,” Commerzbank analysts note.

Key quotes

“Unlike the June meeting, the decision was not unanimous, but it was still a decisive 5-1 split. Its focus is squarely on the inflation risk and away from growth. RBI remained upbeat on growth with 7.4% projected for the current fiscal year and sees inflation at the upper end of its 2-6% target band at 4.8%. The key risks to inflation remain oil prices, INR weakness, and rising inflationary expectations.”

“We remain of the view that RBI could hike one more time this year. This is on the back of robust domestic demand and the hot core inflation reading. We also see two advantages from continue rate hikes, including:  

  1. It provides more yield support for the battered INR. However, RBI does not seem overly concerned over INR’s weakness. This stems from the fact that the macro picture is much better or more resilient compared to the 2013 Taper Tantrum episode. This is reflected in healthy growth, lower current account and fiscal deficits, and ample FX reserves of USD404bn as of July 2018; and  
  2. It reinforces RBI’s commitment to price stability by acting pre-emptively and decisively to anchor inflationary expectations.  

One also gets the sense that the easy decisions are probably over for RBI. The next rate move will be trickier. We keenly await the minutes of today’s meeting due on 16 August to get a better sense of the committee’s bias.”