Indian Rupee: Stronger growth justifies extended RBI tightening – Societe Generale

Societe Generale’s Kunal Kundu now expects the RBI to deliver three 25bp rate hikes, taking the repo rate from 5.25% to 6.00% by early 2027, versus two hikes previously. The revision follows much stronger-than-expected Indian GDP data and a more hawkish Federal Reserve outlook, which together reduce perceived growth risks and raise concern over inflation and external stability.

Stronger growth justifies extended tightening

"We revise our RBI policy-rate forecast to three 25bp hikes, from two previously, taking the repo rate from 5.25% to 6.00% by early 2027."

"This reduces the downside growth cost of additional monetary tightening and suggests that the economy is operating with less spare capacity than embedded in the RBI’s current FY27 growth projection of 6.7%."

"The stronger activity profile also increases the probability that existing food, fuel and input-cost pressures will eventually spill into core inflation."

"With growth materially outperforming, inflation risks tilted upwards and global monetary conditions turning less supportive, a 50bp tightening cycle would be insufficient to restore an appropriate real policy-rate buffer."

"Accordingly, we now expect 75bp of cumulative RBI tightening, most likely delivered in measured 25bp increments each in successive meetings in October, December and February, as evidence of inflation persistence and external pressure accumulates."

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