(Bloomberg) -- India's central bank may extend interest-rate hikes amid worries inflation would exceed its mandated target in the next six months, although a three-quarter point increase is unlikely in the June meeting, people familiar with the matter said.
The Reserve Bank of India opted for an out-of-cycle hike on Wednesday as it didn't want to shock the markets with super-sized increases in the June and August meetings, and to prevent inflation from overshooting the authority's 2-6% target range, according to people, who didn't want to be identified.
RBI Governor Shaktikanta Das said the move to raise rates by 40 basis points and withdraw billions from the banking system may be seen as a reversal of the easing implemented in early 2020 to fight the impact of pandemic. That led to speculation in the market that the RBI may consider raising rates by 75 basis points in the June meeting, reversing what it had implemented back then.
RBI's rate actions will be guided by the inflation trajectory and some market expectations of a 75-basis-point hike may be unfounded, according to the people. The March headline number came as a surprise to the RBI and the April print could also show a spike, the people said.
India's retail inflation in March rose to a 17-month high of 6.95%, a third straight month of remaining above the monetary policy committee's mandate of 2%-6%. If inflation stays above the RBI's 6% tolerance limit for three straight quarters, the governor is required to write a letter to the government explaining the reasons for the surge in prices and the remedial measures.
Bonds sold off after the RBI's shock rate increase, with the yield on 10-year bonds rising by 28 basis points in two days to Thursday.
READ: India's Surprise Rate Hike Spurs Aggressive Tightening Bets
The RBI is extremely mindful that its hawkish measures will be negative for growth in the short term, but will stabilize it in the medium term, the people said.
The central bank is unlikely to implement bond purchases like it did last year via the government securities acquisition program, even though it will support the record borrowing plan, they said.
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