RBI seen lifting rates at modest pace: DBS

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The Reserve Bank of India is seen lifting its key rates at a modest pace to contain inflationary pressures, with another 25 basis point rate increase seen in the July-September quarter, DBS said in a note on Monday.

The Reserve Bank raised interest rates almost a month earlier than expected on Friday, and analysts said it would likely follow up the quarter point hike with another move on July 27, given concerns about inflation above 10%.

"The uncertainties arising from European debt worries and the declining year-on-year inflation prints should keep the central bank from normalizing rates more swiftly," DBS said.

DBS sees one more 25 basis points hike in the repo rate in the July-September quarter with a slightly over 50% chance that it comes in the policy meeting on July 27.

This is expected to be followed by a 50 basis points hikes in the October-December quarter and a 25 basis points hike in the January-March quarter, it added.

DBS expects the corridor between the repo and reverse repo rates to be maintained at 150 basis points and hence both the rates are expected to be lifted in tandem.

"Only short-term OIS rates and gilt yields are likely to rise. Longer-term OIS rates and gilt yields should not increase much, given that the INR yield curves already are extremely steep and all is priced in," DBS said.

Although bond yields and OIS rates are seen under upward pressure, a sharp increase was unlikely as a rate action from the central bank was expected, it added.