Hike in interest rates further expected

Reserve bank of India has warned that the inflation rate is still well above the comfort level and unveiled steps to address persistently tight liquidity, and further added that it it will maintain monetary tightening in January too.

Reserve bank of India has already raised the interest rates six times since march in order to fight rising food costs in a economy that is growing at nearly 9 % per annum..

"The very hawkish tone of today's statement has persuaded us that the next repo and reverse repo rate hike is most likely to come at the RBI's next meeting on 25 January," said Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore.

Still, bond yields and swap rates tumbled after the RBI announced steps to cut the statutory liquidity ratio (SLR) -- the minimum level of deposits banks must hold in government approved securities -- to 24 per cent from 25 per cent, and unveiled $10.6 billion worth of bond purchases over the next month.

Indian is not the only country that is dealing with this severe problem of inflation. The neighboring country china recorded inflation rate at 5.1 per cent at the end of the month of November. It was their highest in pat 28 months.

"There is a risk that rising international commodity prices will spill over into domestic inflation. Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation," the RBI said in a statement.

Due to tight liquidity conditions the banks are forced to borrow around 1 lakh crore per day from RBI,. This decreases their capacity to act as a inflation fighting tool. After the buyback of the bonds it is very much expected that RBI intends to infect liquidity into the system.

"RBI wants to address liquidity first and then get on to hiking rates. After these measures, we expect liquidity to come back to comfortable zones by January," said Ananth Narayan G, head of fixed income, currencies, commodities for South Asia at Standard Chartered in Mumbai.

"Earlier we were expecting liquidity to do the job for RBI and they wouldn't need to hike rates in January, but now it seems if inflation remains high, RBI may hike rates in January," he said.