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Owing to the diverging growth-inflation dynamics between advanced economies (AEs) and India, credit rating agency, India Ratings and Research (Ind-Ra) in its latest report has said that domestic interest rates more likely to be guided by domestic factors such as growth, pro-active supply side management by authorities and higher sensitivity of interest rate over aggregate demand owing to the external benchmark linked loans.

According to the report, structural factors such as the elevated supply of bonds by the central and state governments will keep the interest rate trajectory upwards in the short to medium term. In addition to that, abrupt changes in the geopolitical scenario and the subsequent impact on the business environment could lead to volatility in the financial system.

Ind-Ra further noted that risks to growth have increased, amid the geo-political challenges and supply-side constraints. On the other hand, inflation is likely to remain the biggest challenge for the next few months amid all the geo-political tension, and consequently Ind-Ra expects the monetary policy condition to be more focused on controlling inflation and maintaining stability in the financial system and exchange rate market.