In an attempt to address high headline inflation, the central bank may hike the policy rates before the quarterly monetary policy review on July 27. After the finance minister Pranab Mukherjee and central bank deputy governor KC Chakrabarty said appropriate policy measures will be taken to address inflation, yields of 10 year benchmark government bonds rose to 7.67% from the days low of 7.59% as markets factored in chances of an imminent hike in policy rates.

The Reserve Bank of India (RBI) will take ?appropriate? action to tame inflation as prices are an ?area of concern?,the finance minister told media in Delhi on Tuesday. On Monday, immediately after the inflation data came at a higher than expected 10.16%, the finance minister had hinted a dovish stance on targeting inflation. ?We do not favour an immediate adjustment in rates as the inflationary tendencies will ease from July onwards,? Mukherjee had said.

The central bank has so far maintained that the normalisation of monetary policy will be done at a moderate pace because of uncertainties posed to global economic recovery by the sovereign default crisis in euro zone.

The RBI deputy governor while talking to media said, ?The possibility is always for the rate rise …for us inflation is a bigger concern than Europe.? When asked whether monetary action can be taken before the next policy review, the deputy governor said, ?Absolutely.?

Hard-pressed to target inflation, the central bank can indicate its anti-inflationary stance by choosing any of the two options, said Standard and Chartered Bank head of research Samiran Chakraborty. ?One option in front of the central bank is to keep policy rates unchanged without injecting substantial liquidity into the system thereby keeping interbank borrowing rates at the upper end of repo-reverse repo corridor at 5.25%,? said Samiran Chakraborty.

He further said, ?The second option is to increase the liquidity in the system in the near term but at the same time increase cost of liquidity by increasing key policy rates by 25 basis points immediately followed by another 25 basis points hike in policy rates on July policy review.?

Pressure on the RBI to go for aggressive hike in policy rates will be high in coming months as the headline inflation is likely be exaggerated up to August by a negative base. ?We maintain our earlier call of a hike in the key policy rates ? the repo and the reverse repo by 25 basis points ahead of the quarterly monetary policy review,? said Yes Bank chief economist Subhada Rao.

While any hike in the key interest rates will have an impact on the cost of funds, five to six months down the line strong policy actions will help in anchoring the inflationary expectations. ?We believe that keeping inflation well-anchored is more important than targeting the actual level and the former requires strong policy actions… policy actions become less effective at the margin if delayed beyond a point,? financial services firm Religare pointed out in a research note on Tuesday.

The central bank had kept the key policy rates at record low in 2009 to boost demand in domestic economy that was reeling under global financial meltdown. With growth coming back on track, the repo and reverse repo rates were revised upwards by 25 basis points each for two times since mid March.