The back-to-back rate hike by the Reserve Bank of India (RBI), in June and in August policies, make sense when looked in conjunction with what other countries in the region have been doing.
Indonesia and the Philippines, two nations that run twin deficits like India, have hiked their rates by at least 50 basis points. Even as the RBI maintains that its policies are driven by domestic inflation, the fact that it is moving in line with other countries in the region points out it doesn’t want to remain behind the curve on rates.
Besides, a sticky core inflation, crossing six per cent and the prospect of minimum support price-induced inflation can be tempered if the central bank moves in with a rate hike at the earliest. RBI governor Urjit Patel warned of a currency war in his policy press conference. A rate hike gives support to the currency in this scenario, as rate differential between India and the US increases, prompting more portfolio flows.
