The Reserve Bank of India this week announced a 50 basis point rise in its repo rate to 8.5 per cent, a move that Hugo Navarro at Capital Economics says provided a rebuttal to the mounting criticism that the central bank had done "too little, too late" to stem rising inflation.
However, Mr Navarro says the RBI still has a long way to go to restore market confidence in its inflation-fighting abilities.
He points out that inflation worries have led foreign investors, who helped make Bombay one of the world's stock market darlings last year, to reverse sharply the direction of capital flows. India 's BSE National 500 index is down 36 per cent this year (41.3 per cent in dollar terms), making it one of the worst performing equity markets in 2008.
A steady stream of bad news about inflation and the government fiscal balance have pushed bonds yields to new highs.
But with most of the economy enjoying robust growth, Mr Navarro says the central bank's latest statement leaves little doubt that RBI's overriding priority is to "firmly anchor inflation expectations".
Financial markets are still pricing in a further 100bp increase in interest rates before the end of the year. But Mr Navarro says that by taking tough measures sooner than expected, the RBI may have averted the need to raise interest rates rates much further.
