How do you see the RBI now reacting to the inflation numbers and the Fed hiking rates in the US?

It may not be wrong to say that now India will have to almost relive the US experience on tightening. Let me explain. The macro situation in India and the US is almost similar. There has been a rebound in GDP growth and unemployment levels are down. In India and the US, the supply has struggled to keep pace with demand. Inflation is at 7.9% in the US and at 6.07% in India. In short, prices are almost out of control in both the economies.

The key difference between the two economies is that the US has admitted that inflation is not transitory, while India continues to live under the illusion that inflation will vanish. In short, it is time for the RBI to do a reality check. With the Fed hiking rates in Mar-22 by 25 bps and committing to 6 more rate hikes in the year 2022, India is left with limited choice. After all, even the UK has already effected 3 rate hikes in the past few months.

All this would mean monetary divergence if the RBI does not act to harden rates. Yield gap between Indian debt and US debt could narrow with 2 implications. Firstly, it could result debt outflows like we saw in 2013. The other possibility is of a sharp weakening of the INR. These effects, normally, feed on each other. The moral of the story is that; the RBI is running out of choices and in Apr-22 policy it may have to drop accommodation and hike rates.