The sudden action to raise the rate by 40 basis points on Wednesday, experts said, was likely prompted by some understanding within RBI of a higher retail inflation print in April, a sharp rise rates by the US Fed and deep concerns about domestic food. price given their sensitivity in the political economy of India.

It turned out that the US Fed raised its key overnight rates by half a percentage point nine hours after the RBI’s action on Wednesday. This 50 basis point increase by the US Fed is the biggest jump in 22 years, according to Reuters. His biggest concern remains inflation, the war in Ukraine and new coronavirus lockdowns in China threatening to keep pressure high.

In India, headline CPI (consumer price index) or retail inflation jumped to 6.95% in March 2022, as predicted in the RBI’s April policy statement. The RBI has now indicated that the April print is expected to be high.

Some analysts have warned that the RBI has fallen behind in the fight against inflation. There were also clear directions. The yield on the benchmark 10-year bond has already exceeded the 7% level. “My concern is that the dovish stance carries the risk of falling behind in the future because the stance limits the MPC’s freedom of action in subsequent meetings,” RBI policy panel member Jayanth Varma told Reuters. the Indian Express during an interaction in March. This year.

A senior fund manager at a leading asset management firm said the RBI’s move was also linked to an expected hike by the Federal Reserve later in the night. “Rate hikes by the US Fed lead to large outflows of funds and put pressure on the rupiah, which necessitates currency management by the RBI. was made just before the Fed rate hike is not a mere coincidence,” said the fund manager, who did not wish to be named.

Some economists pointed to the RBI’s statement which reflected serious concerns about rising food prices. “The logical underpinning for the RBI’s rise today and away from the date of regular politics is the growing concern over inflation – particularly in relation to food. Food inflation, more so than inflation non-food, can drastically alter inflation expectations in India,” said Indranil Pan, Chief Economist, Yes Bank.

According to RBI Governor Shaktikanta Das, geopolitical tensions are pushing inflation to its highest level in the past 3-4 decades in major economies while moderating external demand. “Global crude oil prices dominate above US$100 a barrel and remain volatile. Global food prices hit a new high in March and have since strengthened further. Inflation-sensitive items relevant to India, such as edible oils, are facing shortages due to the conflict in Europe and export bans by major producers,” he said.

Soaring fertilizer prices and other input costs have a direct impact on food prices in India. The sharp acceleration in headline CPI inflation in March 2022 to 7% was propelled, in particular, by food inflation due to the impact of the negative fallout from unprecedented global food prices. Nine of the twelve food sub-groups recorded an increase in inflation in March, the RBI said.

The RBI says high-frequency price indicators for April point to continued food price pressures. At the same time, the direct impact of increases in domestic prices of petroleum products at the pump – from the second half of March – is fueling impressions of underlying inflation and should have intensified in April. Going forward, food inflationary pressures are likely to continue, he said.

Continued high crude oil prices and uncertainty over the duration of the Russian-Ukrainian war have led to sustained global inflationary pressures. With the Chinese and Japanese currencies depreciating by 4% and 6% respectively last month, emerging market currencies are under pressure. “Although the rupee has only depreciated by 1.1% over the past month, any further downward pressure on the rupee would raise greater concerns about imported inflation, so a timely rate hike was needed ahead of the inevitable U.S. rate hike expected this week,” said Prasenjit Basu, Chief Economist, ICICI Securities.

According to an RBI survey released last month, household inflation expectations in various cities for the next three months and one year have exceeded the 10% level. “The median perception of household inflation for the current period remained unchanged at 9.7% in the last survey, while expectations for the three months and one year rose by 10 basis points each to reach 10 .7% and 10.8%, respectively, compared to the January 2022 round,” the RBI’s Household Inflation Expectations Survey said.

“There is a collateral risk that if inflation remains elevated at these levels for too long, it may unanchor inflation expectations which, in turn, may become self-fulfilling and detrimental to growth and financial stability.” , RBI Governor Das said.

As the war drags on and sanctions and retaliatory actions intensify, shortages, volatility in commodity and financial markets, supply shocks and, most alarmingly, persistent inflationary pressures and generalized become more acute every day. Over-indebtedness is increasing in the developing world due to capital outflows and currency depreciations. Recent GDP releases suggest the global economic recovery is running out of steam, he said.

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