The actions from the Reserve Bank of India's (RBI) Monetary Policy Committee in the last quarter were focused on policy normalisation.

The effective policy rate has been hiked by about 155 basis points (3.35 percent to 4.90 percent — a shift from reverse repo mode to repo mode) including 90 basis points hike in the repo rate.

Currently, the chances are very high that the RBI may hike its key policy rate by up to 50 basis points taking clues from European Central Bank (ECB) and the US Federal Reserve as they are likely to revise rates by another 50 basis points. It is not only the RBI but also central banks across the world that have been raising interest rates.

Emerging market economies including India are particularly affected by capital outflows, currency depreciations and reserve drawdowns, complicating macroeconomic management with high inflation and faltering growth.

RBI is trying its best to do a balancing act between taming inflation and promoting economic growth. The Central Bank’s focus must remain on inflation. Last week in July, the International Monetary Fund (IMF), had slashed India’s FY23 growth forecast to 7.4 percent from 8.2 percent in April.

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In the recent past, we have seen major headwinds to the Rupee in terms of strengthening of the US dollar against major currencies (US dollar index on July 14 climbed to a 20-year high of 108.54). At the backdrop of a strong dollar and expected higher US interest rates, we have witnessed record selling from foreign portfolio investors (FPIs) in Indian equities.

Meanwhile, high oil prices witnessed in the recent past pose a major risk to the inflation trajectory (Brent crude oil touchinga 14-year high of $140 per barrel).

At present, the macroeconomic conditions are relatively better. Commodity prices are showing a downward trend. Oil prices are off their peak with Brent crude oil near $100 per barrel.

Besides, FPIs have turnedinto net buyers of Indian stocks in July.

The influence of foreign inflows, a sharp correction in oil prices, and the return of RBI in defence of the rupee with spot intervention have helped the Rupee gain after the losing streak in July.

The same has made it tough to breach USD/INR above 80 levels in immediate future. Both government and RBI now seem equally focused to curb the risk of a vicious depreciation spiral in the rupee.

Recent initiatives by RBI to liberalise capital account by way of promoting internationalisation of the rupee has significant importance. Such initiatives typically take time to bear fruit. But there could be quicker spillovers if the rising crude imports from Russia could be mainly transacted in the Indian rupee.

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On the inflation trajectory, there is a significant convergence between RBI estimate and market estimate.

We expect RBI MPC to hike the policy rate to at least around the neutral policy rate levels first, before taking any pause. RBI shifted its policy stance to accommodative in June 2019 when it slashed policy rate from 6 percent to 5.75 percent. This supports the market expectations on rate neutrality near 6 percent. We expect 50 basis points hike in August with continued emphasis on the need for more tightening in the rest of the year.

—The author, Mandar Pitale, is Head — Treasury, State Bank of Mauritius (India). Views expressed are personal

(Edited by : Dipti Sharma)