For a change RBI finally woke up and smelled coffee. So far RBI always felt snug with the belief that they have been quite hawkish all this time, given that they have been raising rates continuously for a fairly longish period of time. Raise interest they did, but how? I fail to understand this fetish for 25 bps hike, save for one ealrier occassion. This not only led to a much delayed response by the lenders to raise rates, such baby steps failed to kill the inflationary expectation the way it ought to have. Not surprisingly, inflation continued on its upward journey, led to wage price spiral and clearly moved from non-core to core raising the heckles all across. Realising the falacy, the RBI finally went for the jugular and raised the rates by 50 bps during the quarterly review of the monetary policy on 26th.
While the RBI has been unusually hawkish in the report released the day before, it also continued with the hawkish view on the day the rate change was announced. As a result, while the general view is that the central bank is not done with rate increases and the expectation is that the next two meetings will see minimum of 25 bps rise in rates in each, I would beg to differ and feel that the RBI might pause now before going for further tightening at a later stage, if the situaiton so warrants.
Why so? This, I feel was possibly the first report where the RBI was so openly scathing in its attack on the government by clearly pointing out the government's failure in being able to remove the supply side constraints. This, I believe, materialised becuase this was the last meeting that the current RBI Governor has chaired, given that his term will end before the next meeting. On the other hand, while the FM and others have been goading the Governor to go slow on rate hikes thus far, they chose to publicly support him this time (despite such a stepe hike) mainly because this was the Governor's last meeting and also because they did not want to bring out the difference too much in the open.
Additionally, one has seen a flurry of rate increases announced by various lenders over a relatively short period of time which can spook demand. Also, with the government failing to make its ends meet, any furter slowdown will result in the final fiscal deficit being way off the mark.
I believe the government will go for a Governor who might be more amiable to their imperatives and this governor is unlikely to act hawkish and antagonise the govenrment, especially in the first meeting.