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Today's rate action is a clear move by the RBI to align itself to prevalent and emerging upside risks to inflation. A 50 bps rate hike in the repo rate (upped to 7.25 per cent) which is now to become the single independently varying policy rate is indeed a positive move. The fixed width of the corridor between reverse repo rate and the newly introduced marginal standing facility will not only keep the volatility in call market in check, but also improve monetary policy signalling in the economy.
Given RBI's guidance towards maintaining a tightening stance, I believe that lending rates are set to move up in the coming months, as banks realign to this tightening stance and higher cost of funds due to the 50 bps hike in the savings rate. We still see room for another 50-75 bps hike in the policy rate going forward by September.
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