“We have a surge in inflation,” and it it will continue to rise, said India’s central bank governor Duvvuri Subbarao, according to Bloomberg.The yield on the country’s 9-year bonds rose immediately after Subbarao’s comments, based on expectations another rate hike may be coming on January 25.
One view was that we must pause for a bit in order for the rate hikes already affected to play out, and then resume tightening. The opposing view was that we should continue tightening to a point that would deliver RBI’s inflation projection and pause only after that.
The dilemma then boiled down to communicating to the market that our action should be interpreted only as a comma and not a full stop.
HSBC’s economist Frederic Neumann told DNA that he expects that the central bank will have to increase interest rates by 1.25% if it seriously hopes to contend with its inflation troubles.
The worry is that a sharp rise in rates in order to tame inflation may actually lead to a downturn for the Indian economy, While right now, there seems to be agreement that India will be experience a “soft landing,” further strong rate hikes may take things too far, and lead to an economic downturn.