India’s Monetary Policy Committee’s decision to hold an unscheduled meeting and hike interest rates off-cycle was intended to smoothen out and stagger the policy response to rising inflation, according to a person familiar with the matter, who spoke on the condition of anonymity.
The central bank took financial markets by surprise on Wednesday, when it hiked the benchmark repo rate for the first time in four years by 40 basis points to 4.4%.
While the MPC had realigned its priorities to focus on inflation at its April meeting, markets expected the first rate hike only at the June meeting.
If the central bank hadn’t hiked rates off-cycle, the extent of rate hikes necessary at the June and August meetings would have been large, said the person quoted above, adding that the economy would not have been able to withstand that.
The central bank’s changed stance and priorities should have given adequate signals to the market, this person said. The view that the central bank has shocked the market is unwarranted, the person added.
In response to the MPC’s rate hike and the RBI‘s decision to hike the cash reserve ratio by 50 basis points to 4.5%, bond yields soared nearly 30 basis points and stock markets fell.
It was necessary to spread out the actions, the person said. This is very much still a central bank taking “baby steps“ and “crossing the river by feeling the stones”, the person said.