India Economy Watch – Is RBI Really ‘Behind’ The Curve?: Motilal Oswal’s Analysis

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In contrast to the general perception, we believe the Reserve Bank of India has been unduly aggressive in its monetary policy normalisation. As India’s economic fundamentals are very different from that of the U.S. and other major nations that have hiked interest rates sharply, a gradual approach would have been more suited.

Although there is some agreement with this reasoning, many market participants defends the RBI’s actions in the context of financial markets. Without such sharp rate hikes, the argument goes, the spread between India and the U.S. bond yields would have narrowed further, leading to faster outflows from India, creating further depreciation in the Indian rupee.

A comparison of India with other major Asian emerging market economies confirms that RBI is the most aggressive and many of its counterparts are yet to begin their rate hiking cycle (although economic fundamentals are similar in many EMEs).

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