Until a few weeks ago, central bankers from Jerome Powell to Shaktikanta Das thought inflation would be transitory. Suddenly, it seems to last.

Inflation of 6.95% in India in March, one percentage point above the central bank’s upper tolerance threshold, stirred markets. Economists are confident that the Reserve Bank of India (RBI) will start raising rates in June.

As he juggles the prospect of missing his inflation target and the desire to stoke economic growth, an unconventional combination of monetary tightening and comforting comments may be the norm.

“With the inflation headline significantly up and momentum still building, we are raising our expected terminal repo rate to 6% by the third fiscal quarter, with a rate hike of 25 basis points in each of the next eight MPC meetings,” Sonal said. Varma, economist at Nomura Securities. “Rising cost of living could lead to higher wages. Rent inflation remains benign, but should catch up with rising property prices. Rising food and fuel prices will also result in higher inflation expectations.”

Inflation as measured by the CPI for March surprised on the upside, with the gauge recording a 17-month high due to high food and commodity prices. With much of the fuel price increases that began in late March yet to take place, the pressure in the coming months could be greater as it ripples through the wider economy.

Growth-oriented Governor Das took a small step last week by putting inflation ahead of growth and focusing on housing shrinkage. He raised the inflation forecast by 120 basis points to 5.7% with 6.3% in the June quarter and 5.8% in September.

This trajectory makes the likelihood that the Governor will have to write a letter explaining why the inflation footprints for the three quarters are rather high. Duvvuri Subbarao, as governor, explained the inflation by citing the sharp increase in the cost of his haircut despite the hair loss. Das can choose a few lines from lyricist Shailendra!

“Everything that has happened around the world has introduced a completely new element into the scheme of things,” Governor Shaktikanta Das told reporters last week. “We are watching emerging trends. How the war is progressing, how commodity prices and crude oil prices will behave in the coming months and therefore whatever action is warranted we will take and all our actions will be adapted accordingly.”

While the convention is to tighten accommodation and then gradually move to higher rates, the magnitude of price pressures may not leave much room for. It now looks like the rate hike may well be at the next meeting on June 8.

“We are revising our CPI forecast to 5.8% for the year, and now expect four 25 basis point rate hikes, starting at the June MPC meeting,” said Rahul Bajoria, economist at Barclays. .

The central bank still believes that demand has not returned to pre-Covid levels warranting the initiation of a tightening cycle.

The RBI, which has tools beyond interest rates, could enforce the liquidity measures as much of the excess liquidity finds its way back to the coffers of the central bank itself.

Currently, the excess liquidity in the system is around ₹7.09 lakh crore. Much of it could be absorbed either through floating rate reverse repo auctions, a sell/buy swap in the forex market, or through various other programs. Despite the crunch, the RBI could keep excess liquidity at around ₹2 crore lakh as it seeks to expand credit. It even has the ability to raise rates without going neutral since it went neutral when the key repo rate, the rate at which the RBI lends to banks, was 5.75% in June 2019.

Inflation calls for a higher cost of funds. What if this could be achieved without tightening key rates too much? The RBI may not have raised the rates, but its commentary did the job. The benchmark bond yield moved 38 basis points to 7.29%, from a low of 6.91% the day before the policy review.

What Bank of England Governor Mervyn King called the Maradona Theory of Interest Rates may already be in play. In the 1986 World Cup, Argentine great Diego Maradona ran 60 yards in a line right by beating five defenders to score his second goal. Defenders had to move right or left; so he ran straight. “Monetary policy works similarly. Market interest rates react to what the central bank is supposed to do,” King said. It may have just started in India.