Having been surprised by the repo rate increase on inflation concern, analysts expect new Reserve Bank Governor Raghuram Rajan to hike the key rate by another 0.50 percentage points this fiscal.
The repo rate hike "indicates that the new Governor is focusing more on inflation than growth. We now expect RBI to increase repo rate by 0.25 per cent each at the next two policy meetings to 8 per cent by end of 2013," house economists at British lender Standard Chartered said.
Stating that the Reserve Bank has shifted to an "inflation targeting framework" without explicitly saying so, Japanese brokerage Nomura said it expects a 0.50 per cent hike in repo rate this fiscal.
"We are changing our policy call because of this sudden regime shift. Our baseline view has been a continuation of the status quo on policy rates in FY14, followed by a 0.75 per cent repo rate cuts in FY15. We now expect repo rates to be hiked by 50 bps to 8 per cent in FY14, followed by a prolonged pause," it said.
Without quantifying the expected hikes, the Credit Suisse economist also said they expect one or two more repo rate increases from in the next few months.
Rajan, a celebrated monetary economist from the Chicago Business School, spooked the markets at his maiden policy announcement by increasing the repo rate by 0.25 per cent citing increased worries on inflation.
Reacting to the move, Pratip Chaudhuri, the chairman of the country's largest lender State Bank of India, said he would be forced to increase the lending rates, much to the dismay of the borrowers.
The support for growth came from the decision to cut the marginal standing facility by 0.75 per cent to 9.5 per cent, which according to the ratings agency Crisil will help bring down cost of funds for banks by 0.4 per cent, if we go by past references on their borrowings.
The Standard Chartered economists clarified that even the two actions on the repo and MSF look contradictory, their aims are not different.
The MSF hike in July was to arrest the steep fall in the rupee and we should