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* The RBI’s MPC hiked the policy repo rate by 50bp as expected, but its accompanying statement turned marginally more hawkish. The Jun’22 statement dropped the intent “to remain accommodative” (contained in the May’22 statement), instead making it clear that the MPC was now “focused on withdrawal of accommodation to ensure that inflation remains within the target going forward”, and implying that it could return to “supporting growth” only after headline CPI inflation had been reined-in to less than 6% YoY. We were previously expecting the repo rate to peak this year at 5.15%, but are now revising that upward to 5.5% (a level likely to be reached at the Oct’22 MPC meeting).

* The quicker rate hikes, and steady monetary tightening since Apr’22, should begin to rein-in headline inflation by Oct-Dec’22. We were previously expecting Brent crude prices to moderate by Sep’22, expecting the JCPOA (Iran nuclear deal) to be revived, and shale-oil supply to gush forth on account of the fact that Brent has been above the US$60/bbl threshold level for 16 months now (since 8th Feb’21). The latter has been slower than expected, and the JCPOA has collapsed, so we expect Brent crude to only moderate to US$75/bbl in Oct-Dec’22. Hence we have raised our forecast for CPI inflation in FY23 to 6.5%, albeit with a steady moderation to 5.5% YoY by Q4FY23.

* The bigger rate hikes will not hurt India’s economic recovery significantly, as the 3- year slump in bank lending (partly a consequence of the spike in the government’s borrowing requirement) is now turning around. As the fiscal deficit recedes (with the strength of government revenue from the 19.5% growth in nominal GDP in FY22, and an increase of at least 15% this year), bank lending and private investment will be crowded in. Equity valuations are already marginally lower than their 10-year mean, so FPI outflow should moderate and possibly turn positive going ahead. While the INR is likely to endure another difficult 3-4 months, it will rally thereafter.

* The monetary policy committee (MPC) of the Reserve Bank of India (RBI) voted unanimously to raise the policy repo rate by 50bp to 4.9%, and “to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. This is a mildly more hawkish statement than the one 5 weeks ago, when the MPC had raised the policy rate by 40bp. The MPC’s May’22 statement said it had “decided to remain accommodative while focusing on withdrawal of accommodation…”, while its latest statement (8 Jun’22) removed the words “remain accommodative”, implying that the MPC had now turned its focus primarily on to the fight against inflation (abandoning all pretence of “remaining accommodative”). It would only be able to support growth once the inflation fight had been won (i.e., CPI inflation was below 6% YoY), which the MPC now judges as unlikely to occur before JanMar’23.

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