Indian Rupee: Gradual tightening path after RBI hike – ING

ING’s Deepali Bhargava notes that the Reserve Bank of India delivered its first rate hike in four years, raising the policy Repo rate to 5.50% and shifting to calibrated tightening. The report highlights upside risks from Oil and a stronger US Dollar for the Indian Rupee, but expects only gradual tightening, with a further 50bp of hikes taking the Repo rate to 6%.

RBI hike and INR policy outlook

"The MPC unanimously voted to raise the policy repo rate by 25bp to 5.50%, marking its first rate hike in four years. It also shifted its policy stance to calibrated tightening, signalling that rate cuts are off the table in the near term. The MPC emphasised that future policy choices would be limited to either a rate hike or a pause, depending on evolving economic conditions and the inflation outlook."

"Much of that assessment will depend on external inflation drivers. Key risks stem from international oil prices, exchange rate dynamics, and global monetary conditions. While we expect Brent crude prices to decline towards US$80/bbl in the fourth quarter, upside risks remain."

"At the same time, further Fed tightening could keep the US dollar stronger for longer, maintaining depreciation pressure on the INR and increasing the risk of imported inflation."

"As a result, barring a significant inflation surprise from persistently elevated oil prices, a stronger-than-expected El Niño impact on food prices, or a sharper INR depreciation, we expect the RBI to continue tightening gradually. Our base case is for a further 50bp of rate hikes, taking the Repo rate to a terminal rate of 6% over the next six months, with policymakers closely monitoring the pass-through of food and energy shocks into core inflation and the emergence of second-round effects."