• India’s central bank joins the club of front-loading central banks, raising the benchmark repurchase rate by 50 basis points to 4.90%.
  • Inflation containment is taking policy priority despite the fact that India’s domestic economic recovery is incomplete.

The Reserve Bank of India (RBI) raised the benchmark repurchase rate by 50 basis points to 4.90% following the monetary policy meeting that concluded today (chart 1). The decision marks the second hike in the monetary policy normalization phase that commenced on May 4 when the RBI raised the repurchase rate by 40 bps following an unscheduled policy meeting. The front-loading of hikes highlights the sense of urgency within the central bank to prevent inflation expectations from rising rapidly and to support the Indian rupee, which has faced a weakening bias against the US dollar on the back of capital outflows. Accordingly, more interest rate increases are in sight; the central bank pointed out that it will “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward”. We expect additional hikes to be announced at each of the policy meetings in August, September, and December, taking the benchmark repo rate to 5.75% by the end of the year.

Fighting inflation has become a policy priority for the RBI. The policy statement emphasized that calibrated monetary policy action is needed to “keep inflation expectations anchored and restrain the broadening of price pressures”. Indeed, the central bank pointed at various uncertainties surrounding the domestic inflation outlook, such as “the tense global geopolitical situation and the consequent elevated commodity prices”. Moreover, it noted that persisting supply side price shocks may trigger second round inflationary consequences. 

Inflationary pressures have intensified in India and will likely remain elevated for a considerable time. Headline inflation reached 7.8% y/y in April, pushed up by increased materials prices, high logistics costs, and rebounding domestic demand. We forecast headline inflation to remain well above the RBI’s inflation target range of 2%–6% until the second quarter of 2023. Meanwhile, the RBI is somewhat more optimistic; it foresees inflation remaining above the 6% target ceiling only until the end of 2022. Regardless, we note that the forecasts are subject to notable uncertainties that reflect food and energy price movements (which together take up over 50% of the Indian CPI basket) as well as the Indian rupee outlook in the context of an aggressive monetary normalization bias in the US. Similarly, India’s core inflation—CPI inflation excluding food, fuel, and light—remains persistently elevated, hovering at 7.2% y/y in April. The upward pressures on prices will be partially offset by the government’s recent decision to not only reduce excise duties on petrol and diesel, but also freeze domestic fuel prices.

The Indian economy is rebounding, yet it is simultaneously facing various headwinds, such spillovers from geopolitical tensions, elevated commodity prices, supply chain bottlenecks, and tightening global financial conditions. Despite many uncertainties, the RBI seemed confident about the economy’s continued recovery. Indeed, sentiment indicators in the country’s manufacturing and services sectors point to robust momentum, fiscal policy remains supportive of economic growth, and prospects for urban and rural consumption are favourable. We forecast India’s economy to grow by 7% in 2022, virtually in line with the RBI’s view that anticipates a 7.2% expansion in the fiscal year 2022–23 (April–March).


This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.

Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.

Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.

This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.

™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.

Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.