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Below is Perspective on RBI MPC announcement by Madhavi Arora, Lead Economist, Emkay Global Financial Services

The 50bps rate hike in policy repo rate is in line with our expectations of RBI remaining front-loaded on rate hikes, after un-anchoring markets’ policy expectation in Apr/May.

The stance continues to be focussed on withdrawal of accommodation. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favor of inflation containment. The reaction function is now evolving with fluid macro realities. The inflation prints of next two quarters are likely to exceed 7%, which could pressure the RBI into acting sooner rather than later.

FY23 could thus further see rates going up by 75 bps+, with the RBI now showing its intent to keep real rates neutral or above to quickly reach pre-Covid levels.

Our Taylor’s estimate shows a max tightening of policy rate by 6% by FY23, of which liquidity tightening to 2% of NDTL is tantamount to another estimated 25bps of effective rate hike.

However, the front-loaded rate-hiking cycle does not imply a lengthy tightening cycle, and once they reach the supposed neutral pre-Covid monetary conditions, the bar for further tightening incrementally may be higher amid increasing growth-inflation trade-offs.

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