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

* “The MPC expectedly delivered a 35bps hike with 5-1 vote and kept stance unchanged at “withdrawal of accommodation”. The tone was still cautious and data dependent, and with the governor emphasizing the need to calibrate the policy. The governor again highlighted the stickiness of core inflation the risk that sustained high inflation could unmoor inflation expectations and lead to second-round effects in the medium term.

* We note that while the governor justified INR’s resilience on net, a relatively dovish tone would not have augur well for INR which has seen sharp correction vs peers in last couple of days.  This has been on account of already low forward premia in FX, and signalling of a pause would have further pressured the FX fwd premia on the downside, making carry trades less attractive for FPIs, implying fears of unwinding of these trades, ceteris paribus.

* A 35bps hike today implies the ex-post real rates still sub 1% -- RBI's estimated real neutral rate, keeping 6-month ahead inflation as an anchor (a more certain trajectory vs one-year ahead), which may imply more space for another shallow hike of up to 25bps to reach a neutral rate (albeit not necessarily implying end of cycle) . At this point, we still think that the RBI would not turn too restrictive however, the extent of global disruption will remain key. We are closely watching the global pace of inflation deceleration and how the impending recession will shape DM central bank policies, which could influence the RBI’s reaction function. The still-fluid global situation might require frequent adjustments in macro and policy assessments ahead as far as terminal rates are concerned.”

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