Markets bet on another rate hike in July

The bond market has started punting on another round of rate hike in July when the Reserve Bank of India (RBI) takes stock of its monetary policy through a quarterly review.

Bond dealers and bankers expect the inflation rate to pierce the 5-per-cent mark and inch towards 5.5 per cent once the full effect of the June-5 oil price hike is factored in. The RBI has projected a 5-5.5 per cent inflation rate for the 2006-07 financial year.

"The RBI will probably not take any chances and go in for another quarter percentage point hike in its reverse repo rate and repo rate when it reviews the monetary policy," a banker said.

The June 28-29 meeting of the Federal Open Market Committee (FOMC), the policy-making body of the Federal Reserve, will also have a crucial bearing on the RBI's monetary stance.

The Fed rate is now at 5 per cent, but it is widely believed that the US Fed may not stop at this point and may opt for another round of quarter percentage point hike in its base rate.

"If that happens, the RBI is likely to tighten its policy further by hiking the reverse repo rate to 6 per cent. If the Fed presses the pause button and the inflation rate is contained at around 5 per cent, the Indian central bank may buy some more time before taking a call on interest rates," pointed out a bond dealer.

The RBI yesterday raised its reverse repo rate by a quarter percentage point to 5.75 per cent, a level last seen in June 2002. It was a move to contain inflationary expectations and protect the rupee, besides being in sync with global interest rates.