With inflation showing no sign of taming down, the Reserve Bank of India (RBI) last week increased the policy repo rate by 50 basis points with immediate effect. In its off-cycle policy measure, the central bank expressed concern over rising food prices, with retail inflation rising further from 7 percent in March 2022 to 7.8 percent in April 2022. The decision is also based on the projection that inflation will remain above 6 percent through the first three quarters of the current fiscal.

In another major move, the Monetary Policy Committee (MPC) of the central bank also took the decision to “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.” For quite some time, the RBI had previously termed the inflationary pressure as ‘transitory’, but this time it clearly dropped the 'accommodative' stance, which is a welcome.

In its assessment, the RBI –while expressing concern over high food inflation “led by cereals, milk, fruits, vegetables, spices and prepared meals” and high fuel prices “driven up by a rise in LPG and kerosene prices” – cites that overall system liquidity remains in large surplus and the Indian economy has witnessed a broadening recovery during the April-May 2022 period. It also points out that both urban and rural demand are gradually improving.

Meanwhile, it is really a concern that the Rupee hit a new low of Rs 78.04 per US dollar, and according to experts, the currency may see further devaluation amid high inflationary pressure –both globally and domestically– and persistent foreign fund outflows. It is also noteworthy here that while the weak currency may give our exporters a temporary boost, the sector is unlikely to benefit much due to supply constraints and rise in cost of inputs.

I invite your opinions.