Today’s monetary policy announcement was aggressive and moves beyond just “frontloading” of interest rates increases. The central bank seemed far more concerned about inflation — reflected in its upward revision in its inflation forecast by 100bps to 6.7%—and relatively more sanguine on domestic growth impulses.
Clearly the RBI is concerned about the broad-based nature of the increase in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level, close to 6% by fiscal year-end.
Bond yields saw an initial relief rally post the policy announcement as the rate hike was broadly priced-in and the fear of a larger rate increase or a CRR hike has been alleviated. That said, with elevated oil prices and rising global yields, this rally is likely to be short-lived and yields could march north yet again.
