Led by the US Fed1 min read . Updated: 03 Feb 2023, 12:40 AM IST
With global central banks on a tightening path, it might be harder for the RBI to hold its policy rate, for that would widen the interest differential with hard-currency assets
The US Federal Reserve on Wednesday raised its policy rate by a quarter-percentage-point to 4.50-4.75%. This follows December’s half-point increase and four successive 0.75-percentage-point increases earlier. While its moves clearly point to a slowing down in its pace of tightening, the rate hike cycle may not yet be over, as was evident in its concern over prices. “Inflation has eased somewhat but remains elevated," its rate-setting body said. On Thursday, the European Central Bank and Bank of England also went for rate hikes, but of double the US size. So, while America might have had relief, inflation remains a bigger threat across the Atlantic. With global central banks on a tightening path, it might be harder for the Reserve Bank of India to hold its policy rate, for that would widen the interest differential with hard-currency assets. India’s budget has nominal figures that assume on-target inflation next fiscal year of 4%, and our central bank is therefore expected to deliver as much. This challenge may tilt monetary policy decisions in favour of a further withdrawal of accommodation. How far the Fed goes is under watch across the world. Inflation targeting has rarely been tested like this.