It has been clear quite a while now that the Reserve Bank of India (RBI) would have to increase interest rates soon. Most expected a rate increase in the monetary policy that is due to be announced on 20 April. The central bank has moved even earlier, raising its main policy rates by 25 basis points on Friday.
The latest data for the economy shows the industrial recovery has become stronger, capital spending is robust and inflation is spreading from food to manufactured goods. Given this, RBI was falling behind the curve. Indian interest rates have to move up by at least another 150 basis points before we can say that monetary policy is neutral.
The rate hike is part of an overall tightening of policy. The central bank started sucking out liquidity when it increased the cash reserve ratio by 75 basis points in January. Money supply growth in the 12 months to 26 February was 16.4%, down from 19.9% a year ago.
India has begun its exit policy in earnest—with the drop in the budgeted fiscal deficit and the rate increase.