The Reserve Bank of India raised its short-term lending and borrowing rates by 25 basis points each, effective immediately.

Announcement

Increased Repo rate by 25bps to 5.50% from 5.25%

Increased Reverse Repo rate by 25bps to 4%, from 3.75%

Motive

To contain inflation and inflationary expectation

Our View

The hikes in key rates are broadly in line with market expectation, however timing are somewhat surprising. Market participants were expecting the hike in rates in the Reserve Bank's Monetary Policy, which is scheduled to be reviewed on July 27.

Before its quarterly review in July-end, RBI will have two sets of data to analyse:

• Wholesale inflation for June

• Industrial production for May

Both will justify another rate hike unless there is a dramatic deterioration in the global economic growth, triggered by the European debt crisis.

The progress of the monsoon will also have a bearing on the decision, but not as intense as inflation does. The monsoon was below normal in June. If it gathers pace and turns normal by end-July, there will be a positive impact on food prices and inflation. On the

contrary, if the monsoon continues to be below normal, it will threaten economic growth.

We believe that, now the RBI will see how the liquidity in the system moves till the announcement of Monetary Policy. If there is no serious shortage of liquidity, the possibility of one more such hike can't be ruled out on 27th July.

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