"RBI hikes Rates"

On  Friday market, closed on a weak note though a positive opening was seen. It turned volatile and choppy with negative bias and slipped into the reds to end near the day’s low. It spent the whole day in a very narrow range of only 44 points. Nifty futures made an  intraday high of 5284 and an intrady low of 5240. It faced some selling pressure towards the end thus closing the day @ 5243.

RBI Raises Repo, Reverse Repo Rates by 25bps in Inter-Meeting Hike:

Rate hikes was expected earllier (Refer Weekly Review on June 27, 2010) ...Timing was the only issue. It was also predicted earlier that by October 2010, RBI's rate hike will be 75bps. We may even see the hike on July 27, 2010.

FROM MONEYCONTROL WEBSITE: "With liquidity conditions easing marginally, the RBI raised the repo (liquidity injection) and reverse repo (liquidity absorption) rates by 25bps each, to 5.5% and 4% respectively, post-market hours on Friday. This marks cumulative tightening of 75 bps since the RBI started normalizing rates earlier this year. With growth gaining momentum and inflation becoming more generalized, an inter-policy meeting was expected in May/June. However, monetary action was pushed back due to (a)events in Europe and (b)the liquidity squeeze following a higher-than-expected response to telecom auctions/advance tax payments. But, with recent data releases on inflation and industrial production surprising on the upside, an inter-policy hike was once again priced in by the markets The RBI estimates that ‘the recent increase in fuel prices will have an immediate impact of around 1% on WPI inflation, with second-round effects being felt in the months ahead’.

We expect further hikes of at least 50bps in 2010 with the next move likely in the RBI's quarterly policy on July 27. Given the growth and inflation outlook, the risk to rates is on the upside. 10- year yields, which closed at 7.54%, are likely to edge higher following this move and trade in the 7.7% range."