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

“The MPC delivered 50bps hike in line with expectations. Clearly, the fast-evolving world order and consistent repricing of Fed’s outsized hikes are strong-arming the EMs. This painful adjustment has not spared the RBI either, which realised the net cost of a supposed soft signalling via shallow hike could be higher than a larger hike of 50bps. This exposes the instability inherent with the classic EM central bank trilemma: one cannot have a stable currency, unfettered capital flows, and independent monetary policy all at the same time.

This conscious front-loading could give them some breather next year on shallow hikes ahead. With inflation likely to be largely in line with RBI’s estimates, this week’s 50bps hike will make the ex-post forward real repo rate positive, albeit still lower than the RBI’s estimated real neutral rate of 0.8-1%. At this point, we still think that the RBI would not go too restrictive and terminal rate could hover near the estimated real rates, implying not more than 100bps hikes ahead, including today’s decision. However, the extent of global disruption will remain key to the RBI’s reaction function ahead.”

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