Following RBI governor Urjit Patel's Op-ed earlier this week, in which he lamented the growing dollar shortage as a result of the Fed's ongoing tightening, it is perhaps not surprising that this morning India became the latest central bank to "surprise" markets with an unexpected rate hike as the country did everything it could to if not prevent, then delay the capital outflow Patel hinted at.

And it was a "surprise", because only a third, or 14 of 44 economists surveyed by Bloomberg, predicted the RBI would hike the repurchase rate by 25 bps to 6.25%, as it did, with the rest predicting an unchanged announcement.

To be sure, the decision was welcomed domestically, where inflation has been trending higher, and Economic Affairs Secretary Subhash Chandra Garg said in a twitter post that he Welcomes the "monetary policy statement. Quite balanced assessment of growth, inflation and external situation and expectations."

The market was a bit more tempered, although after an confused initial reaction to the hike in the INR, which first jumped, the slumped, it eventually closed near session highs, just as the RBI had intended.

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The desired response may not last, however. 

In a note by Bloomberg's Abhishek Gupta, the economist writes that the rate hike may not help the rupee, because as a standard rule of thumb, while raising interest rates attracts capital inflows, causing the local currency to appreciate, this is generally only true for developed economies, and doesn’t necessarily hold for emerging markets, where capital typically doesn't have free mobility. For that reason, a rate hike by the Reserve Bank of India "would likely add to downward pressure on the rupee, which is already suffering from higher crude oil prices."

Perhaps Gupta is right, but at least the kneejerk move was as one would expect. As for tomorrow, we'll see.

Separately, in its comments on the RBI's surprise move, Nomura's Sonal Varma said that the Reserve Bank of India’s decision to maintain a neutral stance signals that it doesn’t want to embark on “a tightening cycle” and that it remains data dependent. The bank said it sees an additional 25 bps rate hike in August as both economic growth and inflation are likely to head higher in coming months. Looking further ahead, Nomura said it sees a pause after that as tightening financial conditions, higher oil prices and political uncertainty may slow economic activity after September.

Which brings us to the main point.

In his take on the RBI's surprise decision, Bloomberg macro commentator Srinivasan Sivabalan writes that after today's rate hike, "the turmoil that has moved from one emerging-market currency to another this year (Argentina, Turkey, Indonesia and now Brazil) is threatening to claim India as the next victim." Specifically, the economist envisions the "familiar coming together of economic doubts and political risks" and lists the following three risk factors which may see the EM contagion spread to the world's second most populous nation.

• While the central bank raised interest rates to keep a lid on inflation (and support the rupee), the move may harm growth that is uneven, as evidenced by yesterday's PMI miss. That raises the bar for further hikes.
• In addition, some government advisors have been arguing against higher interest rates, further complicating the central bank outlook.
• Prime Minister Modi is meanwhile looking a shade more vulnerable going into 2019's elections - his Bharatiya Janata Party and its allies won just three of the 14 seats for parliament and local assemblies in by-elections in May, a united opposition scooped up the rest. If the opposition comes together and poses a more serious challenge this time around, Modi - and investors banking on his victory - may be in for a rude awakening.

As a result, he concludes, investors will be closely watching the central bank to determine how seriously it sees the risk of further currency losses, and whether it is prepared to become more actively involved, even as the economy leaves very little room for additional tightening.

Ultimately, if India's only recourse is to beg the Fed to stop its tightening cycle and balance sheet reduction, the rehearsal to the EM crisis looks like it will soon spread to what may soon be the real ground zero of the real EM crisis.