RBI: Surprise rate hike on inflation concerns - Nordea Research

In a recently published report, "in a surprise move, the RBI raised rates by 25bp to address the rising inflation concern. With a slight hawkish bias, another rate hike cannot be excluded, especially if oil prices remain elevated and the USD resurgence keeps the INR under pressure," Nordea Markets' Amy Yuan Zhuang noted.

Key quotes

"To preemptively address inflation concerns, India’s central bank raised policy rate by 25bp to 6.25% and has likely undertaken a hawkish bias. It was the first rate hike in more than four years and caught market consensus off guard. The decision was made unanimously by the six-member monetary policy committee. The RBI joins a number of EM central banks that tighten monetary policy to counter capital outflows and mitigate upward inflation pressure from weaker currencies."

"Elevated oil prices pose a threat not only to inflation but the country’s effort to restore external balance. This is because India imports 80% of its oil. In an environment where fundamentals matter for EM currencies, India cannot afford to have a wider current account deficit from the current level of 1% of GDP. Deteriorated external balances could weaken the rupee further and put more upward pressure on inflation."