In line with our and market expectations, the Reserve Bank India (RBI) hiked its repo rate by 25 basis points (bps) to 6.50%, its first back-to-back interest rate hike since October 2013. The move follows that of some emerging-market countries like Indonesia and the Philippines which recently raised rates to counter currency routs and inflation risks triggered by a strong USD and higher US interest rates though we expect the US Fed to take a break from hiking rates in this week’s FOMC meeting.

However, the RBI kept its policy stance “neutral” that came as a surprise since this is the second consecutive hike in two meetings and hence the stance should have leaned towards “tightening”. We felt the “neutral” stance suggests that the RBI’s future policy action will be driven by data, especially now that it felt inflation risk is more balanced compared to its previous assessments where inflation risk is on the high side. Thus we expect the policy rate to stay for the rest of the year with 40% chance of a rate hike by 25bps in 1Q2019.

• In line with our and market expectations, the Reserve Bank India (RBI) hiked its repo rate by 25 basis points (bps) to 6.50%. The move by the RBI suggests it is a back-to-back interest rate increase. It is the first time since October 2013 that the rate has been raised at consecutive policy meetings.

• The RBI’s rate hike follows that of some emerging-market countries like Indonesia and the Philippines which recently raised rates to counter currency routs and inflation risks triggered by a strong USD and higher US interest rates, though we expect the US Fed to take a break from hiking rates in this week’s FOMC meeting. We are still looking at two more rate hikes by the Fed i.e. in September and December, each by 25bps.

• Meanwhile, the RBI kept its policy stance “neutral” that came as a surprise since this is the second consecutive hike in two meetings and hence the stance should have leaned towards “tightening”. We felt the “neutral” stance indicates that the RBI’s future policy action will be based on data, especially now that it is of the view that inflation risk is more balanced compared to its previous assessments where inflation risk is on the high side.

• We believe the RBI will maintain its current policy rate for the rest of the year. Meanwhile, we have placed a 40% probability for the RBI to raise the policy rate by 25bps in 1Q2019.

Source: AmInvest Research - 2 Aug 2018