India Shares, Rupee up After RBI's 50bps Rate Hike

There was a positive reaction to news on Friday that India’s central bank raised its key lending rate by 50 basis points to 5.4% to counter persistently high inflation.

Indian shares advanced, while the rupee strengthened and bond yields rose after the move – its third hike in three months.

The NSE Nifty 50 index rose 0.32% to 17,436.95 by 0454 GMT, and the S&P BSE Sensex advanced 0.36% to 58,509.13, after the policy decision.

India’s 10-year benchmark bond yield rose to 7.2317% after the policy decision, while the rupee was trading at 79.03 per dollar.

Economists had predicted the Reserve Bank of India would hike the repo rate by 25 or 50 basis points, given retail inflation hit 7% in June.

The Standing Deposit Facility rate and the Marginal Standing Facility Rate were accordingly adjusted higher by the same quantum to 5.15% and 5.65%, respectively.

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The RBI caught markets off-guard with a 40 bps hike at an unscheduled meeting in May, followed by 50 bps increase in June, but prices have shown little sign of cooling off yet.

With inflation seen holding above the top of the central bank’s 2-6% tolerance band for at least the rest of 2022, more rate hikes in coming months are all but inevitable, economists say.

The price spikes have hammered consumer spending and darkened the near-term outlook for India’s economic growth, which slowed to the lowest in a year in the first three months of 2022

“With inflation expected to remain above the upper tolerance threshold in Q2 and Q3 of the current financial year, the MPC stressed that sustained high inflation could destabilise inflation expectations and harm growth in the medium term,” RBI Governor Shaktikanta Das said when he announced the decision.

“The MPC, therefore, judged that further calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second round effects,” he added.

Das said the decision to increase rates was a unanimous one.

Traders are now awaiting the RBI governor’s comments on the outlook for liquidity in the banking system and any hints on the pace of tightening going ahead.