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Just one month ago, RBI Governor Shaktikanta Das was shrugging off India's rising inflation levels.  "I don’t see inflation going up beyond 6%," he said in mid-March, "In fact, our expectation is that it will moderate to 4.5%."

But then March inflation numbers saw India's CPI (Consumer Price Index) jumping to 6.95%, the highest since October 2020. Economists are expecting it to go even higher in April, and hit an inflation range of 7.4-7.5%. Inflation in May may also breach RBI's 6% target, hovering around 6.8%.

As the chart shows, the bank's main policy rate, the repo rate is now lagging inflation badly compared to historical levels. Since October 2021, consumer inflation has been steadily rising while the RBI held its repo rate unchanged at 4%. The RBI has not in recent history, left the repo rate unchanged for so long. 

As inflation broke RBI's acceptable ceilings, the Central Bank opted for an out-of-cycle rate hike of 40 bps this week. But it's not enough. We can now expect significant rate hikes in the June and August meetings of the Central Bank. The Indian economy will have to endure some pain in the short-term via rate hikes, to (hopefully) stabilize markets in the long term.