To hike or not: Which way will the Monetary Policy Committee swing?

Recent developments suggest tighter monetary policy is inevitable; the question is one of quantum and timing

After months of maintaining the status quo, the monetary policy committee could reach a turning point at its June meeting. Recent developments — both domestic and global — suggest three reasons to consider a shift from ‘neutral’ to a ‘withdrawal of accommodation’.

First, the economy is experiencing a strong cyclical recovery, having dusted off the twin shocks of demonetisation and implementation of the goods and services tax. Both the engines — private consumption and fixed investment —are currently robust. The strength in import volumes is also testament to solid domestic demand. 

Second, consistent with increased domestic demand, core inflation has