India’s aggressive tightening yet to impress markets (Jul 08)

The Reserve Bank of India can be forgiven for having initially taken a less hawkish stance towards inflation. GDP growth was thought to be slowing more quickly than revised data indicate. And few had predicted that oil would top $140 per barrel, putting pressure on subsidy-burdened public finances. Nonetheless, the ensuing fuel price hikes and a surge in inflation to 11.6% has left the RBI on the back foot. Monetary policy has been aggressively tightened since mid-May in an attempt to get ahead of the curve. But it remains to be seen whether the RBI can restore its inflation fighting credentials without having to continue raising rates so far as to risk a sharp slowdown in the economy.