In the best tradition of grabbing the initiative by virtue of a dramatic move, the Reserve Bank of India (RBI) sprang a surprise with its decisive rate hike on Wednesday. Left behind the curve of fast-rising inflation, the central bank raised its repo rate from 4% to 4.4%, reversing its covid relief cut of May 2020. RBI Governor Shaktikanta Das pointed to the “collateral risk that inflation remains elevated at this level for too long,” which could unhinge expectations of price stability. Once people at large expect the rupee to lose its purchasing power, it could become self-fulfilling as folks start doing whatever they can to make up for its deflated value.
RBI’s surprise tightening of policy packed a neat punch by crunching the rate-escalation calendar that financial markets had in mind. For it signalled an urgency that’s consistent with its inflation-targeting mandate, a new will not to let this macro experiment fail our economy. If currency stability within limits proves amenable to RBI’s levers of monetary control, it would serve India’s economic interests well over the long term. After all, the rupee needs to retain its worth at the retail level for it to act as a worthy unit of value and means of exchange.
