The Reserve Bank of India (RBI) unexpectedly hiked its key interest rate on Wednesday because it feared a "shocker" inflation count for April, a person aware of the matter said.
In its first rate move in two years and its first hike in nearly four, the cental bank raised the repo rate by 40 basis points to 4.40%,
"It looked imminent that the April (inflation) number which will arrive on May 12 will be a shocker," the person, who declined to be named because the discussions were private, said on Thursday.
The RBI did not immediately respond to a request for comment.
Markets see the central bank raising its key rates further in coming months as it expects inflation to remain elevated.
India's annual retail inflation accelerated to almost 7% in March, its highest in 17 months and above the upper limit of the central bank's 2-6% tolerance band for a third straight month.
Wednesday's hike drove bond yields to multi-year highs. The 10-year benchmark bond closed at a 3-year high of 7.40% on Thursday.
Economists Thursday told Reuters they expected the central bank to front-load more aggressive interest rate hikes at least until its repo rate hits its pre-COVID level of 5.15%.
The source said the central bank's policy was still accommodative given the country's economic output was below potential and inflation above target.
The central bank is also unlikely to conduct open market operations (OMO) to help the government with its record borrowing of Rs 14.31 trillion ($187 billion) in the fiscal year that started on April 1.
"It would be odd for us to suddenly talk about withdrawal of accommodation and do OMOs which will be counter to the kind of logic we are putting out," the source said.
The source added that the central bank will support borrowing in other ways, but did not give details.
'WILL ACT ALONE'
The RBI's rate hike was also prompted by the government not lowering taxes on retail fuel prices and managing supply side constraints, despite several pleas by the central bank, the source said.
"You should look at this measure (the rate hike) that when it gets tough, the RBI stands alone," the source said.
The RBI "pleaded, begged, exhorted", but the government did not cut taxes on fuel, the source said.
Asia's third-largest economy, which imports 80% of its oil needs, has been hiking excise duty on fuel since March, which has contributed to higher commodity prices.
