RBI's dilemma

12 DEC,2022 | MEDC


The MPC raised the policy repo rate this week by 35 bps to 6.25%. The policy rate has been cumulatively raised by 225 bps so far this year. Much to the discomfort of policymakers, RBI is still some distance away from the terminal rate in the current cycle. The extent and timings of rate hikes henceforth would depend on the evolving economic conditions, including the actions of the Fed, and could pose a policy dilemma for RBI. If the inflation projection for the fourth quarter of the current fiscal year is missed even slightly, it would mean that the rate would remain above the upper end of the tolerance band for five consecutive quarters. RBI cannot afford to take that chance and will have to play it safe by firmly anchoring expectations, no matter how much it may go against the prevailing market sentiment.

*Picture Credit - Googel 

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