The Reserve Bank of India came up with a surprise rate hike late last Friday after market hours. The central bank raised both repo and reverse repo rates by 25 basic points, with only a month remaining for its quarterly policy review in April.
The central bank governor D. Subbarao justified this action by stating that exiting from easy money policy is to be continued to keep the economy on the projected growth trajectory. He said, “Indian economy is heading for a hard landing. In order to curb anchor inflationary expectations and contain inflation going forward, we believe it is better to take some action now and continue on exit strategy.”
According to RBI governor, Indian economy will be bogged down by demand-side pressure in the near future and to contain this scenario, it is better to take immediate action rather than wait for the situation to worsen.
“In RBI, we have maintained the need for exit from stimulus and also that India might have to exit from the accommodative stance ahead of other countries because of our own inflation-growth trade-off,” he said.
The rate hike was essential to curb overheating of the growing economy. Though the economy is growing at a healthy rate, inflation is threatening to dampen the good show. While in November, the inflation was contributed entirely by the spiraling food prices, by February, the food prices have come down and the inflation has spread to non-food items. This is not a happy situation.
In a poll conducted by Reuters among economists after the last rate hike, there are strong indications that by the end of the current year, the rates would be raised by a total of 100 basic points. This is more than that expected earlier.
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