Topic 2: RBI FOLLOWS THE BANDWAGON

The RBI has unequivocally joined the list of global central banks taking decisive policy action to keep inflation expectations under check. In a surprising turn of events, the RBI decided to hike the repo rate by 40 bps to 4.4% and CRR by 50 bps to 4.5% amid rising inflation concerns. The surge in commodity prices and supply bottlenecks pose major headwinds to inflation.

The timing of the hike was important as it preceded the 50 bps increase in the policy rate by the US Fed. This shall ensure that the rupee is safe from any speculative attacks as forex reserves are already down by around $30 billion from their peak levels.

With inflation breaching the upper tolerance level for the past few months and expected to rise further, it was imperative for the RBI to act promptly with monetary tightening measures. Going forward, based on the evolving market situation, the RBI may further hike interest rates. These tightening measures are coming against a weak economic background to which the RBI has ensured to provide adequate liquidity in the system for productive requirements of the economy to support credit offtake and growth.



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