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The persistence of high crude oil prices, and uncertainty over the length of the Russia-Ukraine war, have resulted in sustained inflationary pressure globally. With the Chinese and Japanese currencies depreciating 4% and 6% respectively last month, emerging market currencies are under pressure. Although the rupee has depreciated only 1.1% in the past month, any further downward pressure on the rupee would spark greater worries about imported inflation, so a timely rate hike was needed ahead of the inevitable US rate hike expected this week.
If the Russia-Ukraine war persists beyond May and June, more rate hikes will be needed. If there is an early end to the war (within the next 5-6 weeks), global inflationary pressures will ease, reducing pressure for further rate hikes.
The whole structure of interest rates will harden, implying that loans will be costlier and fixed deposits more attractive. The equity markets will take a negative hit, especially since this was a surprise inter-meeting hike. We were expecting a hike at the next MPC meeting, after the hawkish hints at the last MPC meeting a month ago, but today’s move was larger and earlier than expected.
