In an off-cycle meeting, the Reserve Bank of India (RBI) last week hiked the repo rate by 40 basis points (bps) to 4.40 percent with immediate effect. The central bank is facing an uphill task in containing the current inflation, and though the move, which was surprising as it was taken between two monetary policy reviews – according to the Finance Minister- didn’t, however look like a panic reaction. It was expected sooner than later.

During the first monetary policy review of FY23, RBI last month had kept the policy stance as ‘accommodative’, but raising its inflation forecast to 5.7 percent against the previous estimate of 4.5 percent, signalling the end of an over two-year-long period of ‘ultra-accommodation’. On the other hand, GDP growth projection was lowered to 7.2 percent from an earlier estimation of 7.8 percent, in the background of escalating geopolitical tensions.

Now, the latest rate cut, amid the current inflation driven by the lingering pandemic and a nagging war does not seem surprising. Aggregate demand and growth might be affected drastically by these factors. Our domestic consumption is yet to see healthy rise, and demand recently seen in sectors like affordable housing and automobiles might slip with a rise in borrowing costs. Also, there seems to be little room for expanding fiscal spending due to fear of rise in inflation as well as fiscal deficit.