Will he, won’t he? Or - will the RBI governor keep the policy repo rate intact or increase it to factor in the inflationary forces playing out sedately in the last couple of months and far more aggressively in the last few days? The question was perhaps playing out in the mind of anyone interested in the country’s macroeconomic welfare or looking for inflationary signals.

While most experts expected the Reserve Bank of India (RBI) governor to keep the policy rate intact, there were others who had hoped for a 25 basis point hike in the policy rate, including monetary policy committee (MPC) member, Michael Debabrata Patra, to keep inflationary expectations under check given the changed global and domestic environment. For any central banker it is always better to err on the side of caution rather than allow things to take a turn for the worst, as high inflation hurts the vulnerable sections of the society and also put pressure on the macro-economic numbers.

Things are already slipping out of RBI comfort zone. Retail inflation crossed 5.21% in December—much higher than the RBI’s stated objective of 4%-- on increase in prices of food items. The retail inflation, based on Consumer Price Index (CPI), was 4.88 percent in November. But even the Sixth Bi-monthly Monetary Policy Statement of the MPC prominently highlights the overhang of inflationary pressures in the months ahead, by stating quite clearly that “the inflation outlook is clouded by several uncertainties on the upside.”

First, it believes that the staggered impact of house rent allowance as part of the Seventh Pay Commission package could push headline inflation further and induce second-round effects. A pick-up in global growth in the US, European Union and Japan—the first time since the great financial crisis 2007--may exert further pressure on crude oil, which is already at a three-year high, and rising commodity prices could have inflationary impact on the domestic economy. Meanwhile, bullion prices touched a multi-month high on a weak US dollar

The hike in minimum support price for all kharif crops—1.5 times the cost-- the implementation of the National Health Mission, providing Rs 5 lakh insurance to 10 crore families even if it’s in a staggered manner, increase in custom duties in more than 50 items, are all going to push the inflation needle further.

“Again the fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook... as also on economy-wide costs of borrowing, which have already started to rise,” says the MPC report.

Then there is the normalisation of monetary policy by major advanced economies which along with the domestic forces could further adversely impact financing conditions and undermine the confidence of external investors.

Even though prices of some food items like vegetables and pulses partly reversed in December after rising abruptly in November, other items like eggs, meat, fish, oils and fats and milk continued on their upward trajectory. “Therefore,’’ as Urijit Patel pointed out,“there is a need for vigilance around the evolving inflation scenario in the coming months.”

The turbulence in the stocks, currencies and bond market in the past couple of days—the confluence of domestic policies like the imposition of the long term capital gains tax and the rise in US bond yields—have not only spooked the market but also raised the spectre of a “Second Taper Tantrum”. There is fear of a replay of the taper tantrum in 2013, when bond yields in the US started surging rapidly after the then US Federal Reserve Chairman, Ben Bernanke, signaled the gradual reduction in the quantitative easing (QE) programme. The QE programme, which was the Fed’s massive bond buying programme from US banks—resulted in huge outflow of funds from India and the value of the rupee fell to a record low against the dollar.

And unlike Janet Yellen, the former Fed Chairman, who was very keen not to disturb the emerging markets during any stimulus withdrawal, the new Chairman Jerome Powell has still not made his intentions clear. There is also the inherent danger of the US Fed hiking interest rates more than three times, given its higher growth trajectory, full employment and its decision to push inflation to 2% of the GDP.

The mini crisis in 2013, which saw the fiscal deficit rise to 4.9% and the current account deficit touch 4.8% of the gross domestic product, was partly attributed to RBI governor D Subbarao for not hiking interest rates as aggressively as possible and staying behind the inflation curve. And if the current MPC actually wants to nurture and grow the nascent recovery in the economy through a conducive and stable macro-financial management, as its stated objective, then it should have at least sent a signal by making a small hike in the interest rate - 25 basis points - which would dampen all inflationary expectations for the future.