The Reserve Bank of India (RBI) is expected to raise interest rates on Wednesday, following an off-cycle hike last month to tackle runaway inflation.
Banks were quick to pass on this rise in RBI rates in May by raising their lending and deposit rates.
While banks are slow to accept any rate cuts, the transmission of increases is almost always immediate.
This suggests banks would pass on the expected RBI rate hike to customers before the start of the week.
This, in turn, will push up equivalent monthly payments on loans, increasing the burden on ordinary people, who are already reeling from soaring property prices.
Prices have risen in everything from food to services, and the expected rise in interest rates will weigh on the already strained monthly household budget.
This is the dilemma facing RBI.
Indeed, as the risks of stagflation turn into reality, the hands of the RBI are forced to raise rates.
The central bank faces the dilemma of fighting soaring inflation without hurting economic growth.
Yet the RBI, by its own admission, rose last month after an emergency meeting to stagger rate hikes.
RBI Governor Shaktikanta Das said last month that expectations for rate hikes this month and at the next meeting were “a no-brainer”.
But he acknowledged the central bank’s difficult balancing act – bringing inflation down without hurting the nascent recovery from the pandemic-induced economic downturn.