Following in the footsteps of the European Central Bank and the US Federal Reserve, the RBI is widely expected to kick-start a tightening cycle in the October MPC meeting. Or at least, the market is quite certain the easing cycle is ending, given stronger-than-expected economic growth on one hand, and looming inflation risks on the other.
A monetary tightening mood has officially set in. The market has already priced it in because the inflation risk is real. In its latest bulletin, released last week, RBI says the escalation of West Asia conflicts has resulted in a sharp increase in oil prices, which reignited fears of a build-up of inflationary pressure. “India’s financial and external sectors are drawing strength from the real economy although geopolitical tensions and weather-related uncertainties are acting as key downside risks,” says the central bank’s ‘State of the Economy’ report. Further, it admits that the rise in sovereign yields in some of the major advanced economies has put pressure on government finances.
