Rate hike likely as inflation and FX concerns build

In contrast to the majority of analysts who are expecting no change, we think the Reserve Bank of India (RBI) will raise the repo rate by 25bp to 5.50% at the conclusion of next week’s Monetary Policy Committee (MPC) meeting on Friday 5th June. Rising inflationary pressures have reduced the scope for policymakers to remain on the sidelines, but the main motivation for tightening will be mounting concern over the weakness of the rupee. In fact, a 50bp rate hike cannot be ruled out if the Middle East conflict intensifies over the next week.