RBI Stance Shift Adds Credibility, Another 25 Bps Rate Hike Expected in December: HSBC

The report said the change in stance indicates that rate cuts are unlikely in the near term and that future policy action would likely be limited to either a rate hike or a pause, depending on evolving economic conditions and the inflation outlook.

HSBC continues to expect another 25 basis-point repo rate increase in December, which would take the cumulative rate increase in the current cycle to around 50 basis points.

“There is risk of another, especially if growth remains resilient despite a strengthening El Niño. But for now, we don't see this as a deep rate hiking cycle,” the report said.

According to HSBC, a key issue before the Monetary Policy Committee was how the central bank could reinforce policy credibility amid an increasingly challenging global environment, marked by elevated oil prices, higher global bond yields and movements in the US dollar index.

The report said the decision to alter the policy stance demonstrated that the RBI is prepared to maintain a tighter policy approach if global financial conditions remain unsettled for an extended period.

The central bank has maintained that a portion of the recent inflation pressure is attributable to base effects, while there is limited evidence of significant demand-side pressures in the economy.

RBI Governor Sanjay Malhotra described calibrated tightening as a milder form of monetary tightening. He indicated that excess liquidity would be reduced gradually through factors such as an increase in currency in circulation, alongside the continued use of existing liquidity-management tools.

These measures include variable rate reverse repo operations, foreign exchange swaps, spot foreign exchange sales and open market operation sales.

The governor also indicated that an increase in the cash reserve ratio remains an option, but is relatively low on the list of preferred measures for managing liquidity.