The Reserve Bank of India (RBI) on Wednesday raised the interest rate by 50 basis points to a two-year high of 4.9 per cent as it set out to curb inflation that has spiked in the last couple of months. All six members of the RBI Monetary Policy Review Committee (MPC), led by RBI Governor Shaktikanta Das, together voted for the latest rate hike.

“Unlike previous RBI Monetary Policy Review announcements, RBI has been assertive in prioritizing inflation control over growth, and yet assuring of necessary action based on how the environment dynamics change.

We agree with RBI’s assessment that India is doing relatively better than other emerging market economies, and we feel that the growth impetus will continue, aided by a normal monsoon and an uptick in exports. A gentle nudge to state governments to reduce duties needs to be implemented.

The interest rate hike has been on expected lines and has already been discounted by the market. The growth rate estimate being unchanged and the expectation of inflation coming below 6% by end of FY23 should be taken as positives. A positive report card on the Banking sector should augur well for the sector as a whole.

We remain confident about the Indian economy and the markets doing well, but as always, the ride can be bumpy because we can expect further measures to squeeze out liquidity over the next few months. Interest rates will have an “upward bias” in the updates from the RBI Monetary Policy Review in June 2022.

Note: These views were also published in Zeebiz.