Indian equity benchmarks witnessed selling pressure in the last couple of hours of Friday trade. The Sensex shed more than 200 points in intra-day trade ahead of policy meet on Tuesday next week.
Despite high inflation figures that make this policy meet very crucial, Reserve Bank of India (RBI) governor Duvvuri Subbarao is expected to continue with his calibrated approach in hiking policy rates by 25 basis points only.
Experts too believe the 25 basis points hike in key rates but 50 bps hike will turn the sentiment negative.
Deven Choksey, MD, KR Choksey Shares and Securities said, "The monetary policy to a certain extent is a known element for the market. As long as the 25 bps rate effect is coming in, the market has discounted monetary policy. However, if the rate increase is 50 bps then the market may look little negative."
Going with the street consensus of a 25 bps hike each in repo and reverse repo rates, most banks are bracing up for another round of lending rate hikes post the RBI policy announcement. "Interest rates are near the peak. If RBI hikes policy rates (repo and reverse repo), we would also pass it on our borrowers," said S Raman, CMD, Canara Bank. He expects the RBI to hike both by 1% each in FY 2011-12. Raman, however, sees a limited scope of deposit rate hike as we are already ahead of the curve.
Repo is the rate (6.75%) at which banks borrow money from RBI. Reverse repo is the rate (5.75%) at which banks lend to RBI. Meanwhile, bankers do not foresee any change in the rates of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).