The Reserve Bank of India (RBI) recently caught everyone by surprise by deciding to hike the policy rate. The decision may have taken the market off guard but it has become inevitable to tame the soaring inflation. The decision, taken at an unscheduled meeting of the Monetary Policy Committee (MPC) of the central bank, sends a clear signal that rising inflation is going to be a bigger policy challenge than growth for the Indian economy. After holding off tough measures to check inflation, the RBI finally cracked the whip and hiked the repo rate by 40 basis points and the cash reserve ratio (CRR) by 50 basis points.
As a result, the revised policy rate and CRR now stand at 4.4 percent and 4.5 percent, respectively. While the MPC has kept the official stance of monetary policy as accommodative, it has maintained that it is being accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target. The significant upside risks to the inflation trajectory – skyrocketing fuel prices due to the ongoing war in Ukraine and the spiralling commodity prices – could have prompted the tough measure. The expectation of a sharp hike in interest rate by the United States Federal Reserve – which eventually happened hours after the RBI’s announcement – could have also played a role in hastening the process. It remains to be seen how far the optics of fighting inflation like the interest rate hikes will actually impact the country’s economic recovery process. What is certain, however, is that the burden on the common man is going to increase in the days ahead. The common masses are going to suffer. The government will have to take more initiatives to help the public.