RBI's 25 bps rate increase announced on Wednesday is significant. But equally important is the signal that accompanied it. By raising the repo rate to 5.5% and shifting its policy stance from neutral to 'calibrated tightening', MPC effectively signalled that the debate has moved from whether rates should rise to how far they may have to rise.
Immediate trigger is obvious. Elevated oil prices driven by geopolitical tensions in West Asia, a weak monsoon and El Nino-related weather disruptions have worsened India's inflation outlook. RBI now expects inflation to average almost 5.8% over the next 3 quarters.
