Commerzbank strategists note that the Reserve Bank of India kept the repo rate at 5.25% and maintained a neutral stance while signalling rising inflation risks. They expect a 25bp hike by year-end as higher Oil prices, El Niño-related food pressures and robust domestic demand keep inflation elevated. Coordinated RBI-government measures aim to attract foreign capital and support INR.

RBI holds rates, rupee-support package

"The Reserve Bank of India (RBI) voted unanimously to leave the policy repo rate unchanged at 5.25% last Friday, in line with market expectations. Policymakers noted that “there are considerable risks to the MPC’s baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the conflict”. The decision suggests the RBI is prioritising policy flexibility amid elevated external uncertainties, seeking to avoid premature tightening while assessing the economic impact of higher energy prices and geopolitical disruptions."

"RBI maintained its neutral policy stance. It reiterated that it will "continue to remain data-dependent and closely monitor developments, including supply-side pressures getting embedded in the general price level and inflation expectations". With April CPI inflation at 3.5% yoy, below the RBI’s 4% midpoint target, policymakers retain some room to adopt a wait-and-see approach."

"Overall, RBI appears comfortable remaining on hold for now, but rising inflation risks suggest the next move is more likely to be a hike than a cut. We continue to expect the RBI to raise rates by 25bp before year-end, possibly in October."

"In FX, USD/INR fell 0.9% to 94.94 on Friday and declined 0.1% over the week after the RBI and government unveiled a coordinated package of measures aimed at attracting foreign capital and supporting the rupee. The RBI expanded the Fully Accessible Route (FAR) to include new 15-, 30- and 40-year government bond issuances, while the government removed capital gains and withholding taxes on government securities held by foreign investors."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)