The money market is gearing up to face the next punch to be delivered by the Reserve Bank of India (RBI) against inflation, in its forthcoming monetary policy review of July 29. The market expects the central bank to raise the key rates and cash reserve ratio (CRR) by a good 25-50 basis points each.

Beginning this week, the markets, which have been badly hit by the continuing high inflation and high crude prices, are likely to see further tightness as the second phase of the CRR hike, which came into effect on Saturday, sucks out Rs 8,000 crore from the banking system.

Dealers expect money supply at 21%, above the RBI target of 15-16%, may finally start shrinking.

?Liquidity will head towards the negative zone as the government borrowing programme and the effects of the second tranche of the CRR hike will set in,? said S Srinivasa Raghavan, head of treasury at IDBI Gilts. If things get worse, Raghavan expects bond yields, which had recovered last week, to inch up considerably during the week. ?Inflation will be seen on the lower side for the next 2-3 weeks due to the base effect of last year,? he said.

The wholesale price index rose 11.91% in the 12 months to July 5, lower than market expectations of 12.05%, but the highest since annual numbers in the current series became available in April 1995.

Further, RBI will sell 8.24%, 2018 paper for Rs 6,000 crore on July 24.

?We expect the repo rate to be hiked by 25 bps and CRR by another 50 bps during the monetary policy review. It?s going to be a very hawkish policy,? predicted Raghavan.

At the same time, call rates are likely to remain on the higher side due to the liquidity crunch. ?Call rates will remain on the high side for the next few days, and are not seen coming down below 9%. The central bank?s tightening-spree will continue as inflation is still a concern. Liquidity management will be the top priority,? said Rugved Dhumale, senior manager of risk management solutions at Mecklai Financial and Commercial Services.

However, the liquidity lost will be regained once government spending starts during the first week of August.

?A lot will depend on government spending, and whether that eases liquidity pressures,? said a foreign bank dealer. During the past week, RBI has been pumping liquidity heavily through its daily money market operations to help banks tide over the tight cash conditions. Dealers said the trend will continue as there was also a need to ensure enough liquidity in the system.