RBI’s focus on inflation is timely

On Wednesday, the Monetary Policy Committee of the Reserve Bank of India increased the repo rate by 25 basis points, raising it from 5.25 per cent to 5.5 per cent. This move was unanimous among all six members of the committee and closely anticipated. The more significant change, however, was the RBI's stance shifting from "neutral" to "calibrated tightening." The last time the RBI took this stance was eight years ago. The RBI's primary mandate is to ensure price stability while considering economic growth.

The Indian economy demonstrated resilience in the first quarter of 2023, growing by 7.8 per cent, which exceeded expectations. Consequently, the RBI has raised its full-year 2026-27 growth forecast from 6.7 per cent to 7.1 per cent. However, the domestic inflation outlook has worsened due to the escalating conflict in West Asia, rising global crude prices, a deficient Southwest monsoon, and El Niño conditions.

Retail inflation has consistently surpassed the RBI's 4 per cent target, with the central bank now projecting it to reach 6 per cent by December, with annual inflation expected around 5.2 per cent.

Given that growth remains strong while inflation is rising above the target, raising the repo rate to curb overall demand and prevent inflation from broadening is timely. Notably, the RBI's shift in stance indicates a focus on addressing potential inflation spikes. Interest rate cuts are no longer an option, and the RBI has signaled the beginning of a rate hike cycle, anticipating that other global central banks will also raise interest rates in the coming months.