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Paper Number :WP37/2024
Publication Date :March 27, 2024

The main objective of this article is to critically assess the monetary tightening measures adopted by Reserve Bank of India (RBI) since April, 2022, and analyse its effects on money, bond, deposit and credit markets, including the real economy. It briefly looks at India’s quarterly inflation performance and also analyse the performance of MPC’s inflation forecasts in recent times. We saw full transmission of monetary policy tightening to the interest rates in money market, though it was much lesser in the case of the long term sovereign bond market, where the yield curve relatively flattened beyond the 5 year tenor. Both deposit rates and lending rates have moved up nearly in tune with the rise in policy rates. The policy impact was also felt in the credit market as the credit growth started decelerating after a lag during initial tightening phase and reversing after the rate pause. Deposit growth, which stayed lower and below the credit growth for some time, are showing some signs of catching up with credit. Both Inflation and GDP growth rates in India has been falling in response to rate hikes, albeit with a lag. India’s successful disinflation is attributed to a confluence of factors such as RBI’s repo rate increases, aggressive global rate hikes, progressive mending of global supply chains, Indian Government’s active supply side measures to address food and fuel inflation and deep economic slowdown in China. Major global central banks have signalled rate cuts in the near future after experiencing moderation in inflation and growth towards their target, which are keeping the financial markets stable and in risk on mode.