The Reserve Bank of India (RBI) on Thursday left no one in doubt that it is determined to tame inflation, while maintaining there was no evidence of any sharp or broad-based slowdown and that pricing power remained intact. Although the central bank upped the key policy repo rate by just 25 basis points taking it to 7.5%, the accompanying commentary was distinctly hawkish, indicating that another increase in policy rates will happen soon, perhaps in July. Wholesale inflation for May came in at 9.06%.

?The monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control,? the RBI observed in its mid-quarter monetary policy review, pointing out that domestic inflation persists at uncomfortable levels and that ?the headline numbers understate the pressures because fuel prices have yet to reflect global crude oil prices?.

The central bank seemed somewhat sanguine about slowing growth, noting that while there had been some deceleration in certain interest rate-sensitive segments, there was no evidence of any sharp or broad-based slowdown. GDP growth decelerated to 7.8% in Q4 of 2010-11 from 8.3% in the previous quarter and 9.4% in the corresponding quarter a year ago. However, the RBI has, for the first time, cautioned that given the high degree of integration with the global economy, ?recent global macroeconomic developments pose some risks to domestic growth?. Indeed, the central bank concluded that while it needed to persist with its anti-inflationary stance, ?the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory?.

Nonetheless, given that inflation remains well above the RBI?s comfort zone, the Street expects some more tightening in the near future. Says Samiran Chakraborty, head of research, Standard Chartered Bank, ?There will definitely be more hikes and the central bank is likely to pause only after it is comfortable that core inflation is trending down. Depending on how good the monsoon is and how the global recovery shapes up, we could have one or two more hikes.?

Bankers, who were quick to increase lending rates after the central bank upped the repo rate by

50 basis points on May 3, said that while lending rates may not go up immediately, higher loans rates were inevitable.

Said Chanda Kochhar, MD and CEO, ICICI Bank: ?Today?s hike and the prevailing systemic liquidity conditions could lead to an increase in funding costs for banks and in lending rates.? MD Mallya, CMD, Bank of Baroda too acknowledged that banks would be compelled to raise loan rates especially if there was another rate hike in August. The stock markets reacted negatively to the comments of bankers, with the benchmark Sensex coming off by 146 points following a 176 points fall on Wednesday.

While observing that there was need for better price stability to sustain growth in the medium term, finance minister Pranab Mukherjee said the RBI had sought to maintain an interest rate environment that moderates inflation and checks inflationary expectations.

Bond markets which had pencilled in a 25 basis points hike fell initially but rallied thereafter with the ten-year benchmark yield closing at 8.29% compared with 8.39% on Wednesday. The rally, however, is expected to be short-lived. Observes Rohini Malkani, chief economist at Citigroup: ?Sticky trends in inflation, coupled with the RBI?s stance of bringing it down at the cost of growth, prompt us to maintain our view of a further 50 basis points tightening in 2011 taking the policy rate to 8% by end-2011. We expect benchmark yields to remain range-bound between 8.25% and 8.50%. In keeping with the RBI?s objective of maintaining a 100 basis points corridor between the repo and reverse repo rates, the latter now moves up to 6.5% while the rates at which banks can now borrow through the marginal standing facility moves up to 8.5%. The cash reserve ratio was left untouched at 6%.