The RBI kicked off its tightening cycle this month with a 40bp hike to the repo rate (to 4.40%) in an unscheduled policy announcement. The minutes to that meeting show that several MPC members are keen to frontload policy tightening to keep a lid on already-elevated inflation expectations, and we expect a 50bp hike in June. The Finance Ministry is helping out, at the margin – it is cutting excise duties on fuel and ramping up fertiliser subsidies to cushion the impact of high commodity prices. But these moves will require fiscal loosening and so won't stem upward pressure on bond yields. There are options for policymakers to push back if rising yields start to threaten the public debt trajectory. We will explore these in detail in forthcoming research.
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