RBI raises rates more than expected: Analysts

The Reserve Bank of India (RBI) raised interest rates more forcefully than expected on Tuesday in the face of inflation that has held stubbornly above 10 per cent for the past five months.

The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 per cent, in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 basis points to 4.50 per cent.

Economists and investors had expected a 25 basis point increase in the reverse repo rate.

KEY POINTS:

* RBI says "imperative" to continue normalising policy consistent with growth, inflation.

* Repo rate raised 25 bps, as expected. Reverse repo rate raised 50 bps, twice as much as markets had expected

* RBI revises WPI inflation forecast for end-March to 6 per cent, says inflationary pressures have become generalised

* RBI says domestic economic recovery firmly in place

COMMENTARY:

GAURAV KAPUR, Sr Economist, Royal Bank of Scotland, Mumbai says, "The RBI's action is little more aggressive than anticipated. By narrowing the LAF rate corridor, the RBI has ensured that rates, especially on the short end, remain anchored around a higher rate even when liquidity conditions go back to surplus."

"The RBI thereby has gone a step ahead in its calibrated tightening. This move may, however, have limited impact now considering that the operational policy rate at the moment is the repo rate."

"The clearly strong and generalised nature of inflationary pressures, coupled with improving growth conditions, have forced the RBI to act with more urgency. The RBI would have to hike policy rates by another 50-75 bps during the fiscal year."

NILESH SHAH from ICICI Prudential to CNBC says that RBI  is trying to balance between managing inflation and ensuring growth

SHAILENDRA BHANDARI from ING Vyasa to CNBC says that base rates will be raised by 0.25% and EMIs are likely to rise further

MARKET REACTION: - The Indian rupee moved to 46.81/82 per dollar after the news from 46.84/85 earlier.

- The benchmark 10-year bond yield slipped one basis point to 7.66 per cent. Swap rates also eased marginally.

- The Bombay SENSEX stock index rose 0.3 per cent. It was little changed before the announcement.

BACKGROUND:

- Wholesale price index inflation in India was in the double-digits for five consecutive months through June, and India's chief statistician said on Monday that the figure for July was likely to be 11 per cent.

- Inflation which started with high food prices due to last summer's poor monsoon has spread into the broader economy.

- Economists polled last week by Reuters mostly expected the RBI to lift rates by 25 basis points at each of its upcoming quarterly policy reviews, starting with Tuesday's, for the remainder of the fiscal year ending in March 2011.

- Price pressures are expected to remain strong in coming months, though the government is hoping that a good harvest will cool food prices later in the year. India's economic growth is expected to accelerate to 8.4 per cent in the current fiscal year due to stronger industrial output and robust domestic demand, according to a Reuters poll. The economy expanded 7.4 per cent in 2009/10.