Mumbai: The central bank may hike rates by 25 basis points (bps) more in its April review after the surprise move on Friday, Kotak Mahindra Bank said in a note.
The Reserve Bank of India (RBI) is likely to raise the repo rate by another 100-125 bps and the cash reserve ratio by around 75-100 bps by the end of March 2011, it said.
“In its effort to remove the monetary stimulus, RBI’s actions are likely to remain measured, in turn ensuring that the reverse repo rate remains the operative rate for FY11,” economists Indranil Pan and Shubhra Mittal wrote.
The RBI on Friday unexpectedly raised interest rates from record-low levels for the first time since it began cutting in 2008, citing intensifying inflationary pressures and a steady economic recovery.
The central bank move would not hamper the banking system liquidity, which would remain adequate and would not affect credit expansion, according to the Kotak Mahindra Bank note.
However, liquidity needs to be kept comfortable in the banking system to accommodate the government’s gross borrowing of Rs4.57 trillion in the fiscal year starting 1 April along with the rising credit needs of the private sector, it added.
Kotak also expects cash conditions to remain comfortable after the latest central bank move and it would not lead to an increase in banks’ lending and deposit rates.
However, it expects the benchmark 10-year bond yield to rise to around 8.50% levels in FY11.